There's Still a Better Bailout Available 11 comments
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Perhaps the tide is turning. Congress is now receiving more calls in favor of the bailout? Ugh. People are so attuned to short term market moves defining what is right or wrong. They would surrender their liberties just to make the markets rise. Well, the Senate votes on Wednesday evening, and the House probably on Thursday, so I urge my readers, and the rest of the blogosphere to call Congress to oppose the Bailout.
Now, the current plan is better than the original one, having more oversight, and requiring equity stakes. I still don’t like the proposal, because it won’t work on the areas of our economy that need help now, mainly the short term lending markets between banks.
As it is, the pressure in those markets is high, and the Fed is stretching its balance sheet to cope. Other nations and central banks are acting to stem the panic, and are moving to support the short-term lending markets.
This is a global crisis, with rates rising in Asia, with failing banks in Europe, and the rescue of AIG protecting the interests of European banks, as well as domestic institutions. The other nations of the world should step up to their responsibilities; we are all in this together. If not, we will probably experience a global recession lasting two or more years.
Not that anything is certain in economics; the global economy has been straining over the last few years to goose growth in ways that seem foolish to me. We know the lessons of mercantilism. Why force exports when the returns may prove to be far less than advertised? China may laugh over a growing economy where they sell an increasing amount to the US, but what are they receiving in return but devaluing US T-notes?
Look, there is a better bailout available. Aim at the short term lending markets; use the $700 billion to recapitalize the Fed, and let them provide liquidity until the short-term lending markets calm down.
Or, use the money to take super-senior convertible stakes in financial institutions that are in trouble. If the government is bailing institutions out, let them do it in a way that minimizes loss, that they would have a senior creditor position if there is loss, and significant ownership if there is a recovery.
With that, I close by saying don’t listen to foolish people who say that we can make money off of the bailout. The objective of a bailout is to lose less money than you expected. There are rare cases where money is made, but as we would expect with government intervention in tough times, the incentives are perverse.
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This article has 11 comments:
Congress should drop the Paulson Plan and instead pass the No BAILOUTS Act. The No BAILOUTS Act provides an alternative to the Paulson Proposal to address the current credit crunch. Once Congress addresses the liquidity shortfalls in our financial markets it can turn to solutions to address the broader economic crises we face today. Specifically, Congress can work to resolve the housing crisis across the country and pass effective job stimulus, which is the response Main Street America expects and deserves.
While Democrats and Republicans may disagree on the underlying solutions to solve the economic crises we face, the No BAILOUTS Act - a regulatory based proposal - has the potential for significant bipartisan support.
The Paulson Premise is Flawed
Simon Johnson, a former chief economist as the International Monetary Fund, stated in the New York Times that Paulson’s plan, “in a fundamental sense, will not solve the problem.” Other economic analysts have noted that credit markets around the world were almost entirely dysfunctional even when political leaders and investors assumed that Congress had reached a deal and would easily approve the bailout. There is no reason to believe Paulson’s plan will work.
Alternatives
There are credible alternatives to the Paulson/Bush $700 billion gamble. William Isaac, the chairman of the FDIC during the previous worst financial crisis in the United States during the 1980s, believes Congress can address the current crisis with simple changes to Securities and Exchange Commission (SEC) rules. Mr. Isaac points out that while we face serious financial challenges today, many banks are still in good shape. This allows Congress to take swift, uncomplicated steps to ensure the financial markets return to working order. After that, we can work to resolve the housing crisis and pass effective job stimulus.
The No BAILOUTS Act alternative to the Wall Street bailout will correct the capital shortfalls experienced by many financial institutions and help protect the integrity and quality of the securities market. This could be implemented promptly meeting the demands of the Bush Administration to act immediately without putting the American taxpayer on the hook for billions of dollars.
No BAILOUTS Act
Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security
1) Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.
This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.
2) Require the Securities and Exchange Commission to restricting naked short sells permanently
This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.
3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.
This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies “to protect the integrity and quality of the securities market and strengthen investor confidence.” This rule prevents market crashes brought on by irrational short term market behavior.
4) “Net Worth Certificate Program”
This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount “borrowed” as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.
Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.
In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.
5) Increase the FDIC Insurance limit from $100,000 to $250,000.
The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.
Stone Fox Capital... "Buffett, Cramer, and Gross will pass on the market and let it fall into abyss." Ha! Ha! Ha! I needed a good laugh this evening.
The bail-out plan is now a mix of spending and tax cuts. I'm sure it's knocking on the $1 trillion figure right now. Of course if they continue backing FDIC like they have through the years, that won't cost them a dime. They'll just say everybody is covered a pray nobody cashes the chips in.
This whole thing reminds me of an old economics story...
This guy is brought into hospital with sever hemorrhaging after being involved in an auto accident. The doctor, rather than using any of the many new techniques that came about after he left med school, like using expanders, he finds a single blood donor with the correct type of rare blood.
The doctor works long into the night with his 1930's approach to the patient... Bandages, direct pressure and blood transfusion after blood transfusion... Several times the patient's heart stops, but he's revived each time...
At mornings light it's apparent that the patient will live, although severely brain damaged since his heart stopped so many times. The doctor thanks his assisting nurse and ask her to take care of things since he needed to get some sleep. The nurse says, But doctor, aren't you forgetting something? Quizzically he looks at her and says, I don't think so. She responds, You need to make a pronouncement for the donor. He's dead. You took all of his blood.
Payback. It's a mother f......