The Congressional Misstep & the Future of Our Economy

The Bailout passed by Congress will bankrupt the United States, officially. I have made my position on this subject quite clear. I also offered this proposal a week ago. This proposal is very simple and effective, it limits risk, and does not increase debt burdens on the country. In addition, it quantifies the impact on the market and Wall Street will embrace this defined approach.

Formal Proposal:

1. Develop a Guarantee Trust Organization to protect banks who lend to one another.  This would act as insurance between the banks.  The US Government would guarantee the monies and the risk of default between the banks operating in our banking system would be completely removed from the equation.  This is the primary goal of any and all proposals made thus far, but none tackle the issue directly.  This is a direct influence to encourage activity within the system.
2. Require banks to separate themselves into 'Good Banks' and 'Bad Banks.'  The disposition would be exactly like the purchases of the good assets of Washington Mutual (WM) by JP Morgan (JPM), and the attempted purchase of Wachovia (WB) by Citigroup (C). 
3. The GTO would guarantee lending based on the assets of the Good Bank and not the bad assets.  This would reduce the volume of lending activity overall, but it would also allow the system to operate.  A contraction in the system is required and it will happen regardless of the eventual accepted proposal.  My plan would quantify that contraction.
4. In the event of bank failure the GTO would absorb the assets of the 'Good Bank' to preserve the integrity of the accounts, protect FDIC, and spin those assets off to a willing buyer in the open market.  The 'Bad Bank' and the proceeds from the 'Good Bank' would be left to reconcile in bankruptcy court. Only in the event of bankruptcy would the Good Assets be spun off.
5. The GTO would recoup the guaranteed funds immediately following the sale of the Good Bank in the open Market.  Therefore, the proceeds of the Good Bank would be the net purchase price agreement less the guaranteed funds.  Shareholders of the defunct bank would be left to resolve the remaining assets in bankruptcy court.

This plan is simple, and simple works. The Banking System will be preserved, although it will have contracted. The measure will be quantifiable, and this will please Wall Street and prevent widespread panic. Lending will resume, and the integrity of the Economy will be preserved. Global Economies will also be direct beneficiaries.

The Taxpayer will assume very little risk. They will not have the burden of holding potentially valueless assets and the US Government will not inch closer to bankruptcy because of this fiasco.

Banks will fail, and they should be allowed to fail. The shareholders and bondholders of those banks will be impacted, and they should be. The good assets of the banks who fail will be absorbed into sound financial institutions and a more stable, reliable, and powerful banking system will prevail. This will take time, but in the end the integrity of our banking system will be much more than it is today.

More defaults and foreclosures will occur, we need to accept that. In many cases greed forced the hand of ARM loans and other creative loans which are now causing the system to fail. Those persons who engaged in these risky loans, with full knowledge of the risk, should be blamed as well. There are three perpetrators: Government, lenders, and borrowers. Politically, this may not sit well with some members of Congress. However, it should. If your constituents took aggressive loans based with the intention of making a quick buck and they were left holding the bag, taxpayers should not be forced to bail them out.

My plan is simple, straightforward, it works, it preserves capitalism, and it will restore our banking system, our economy, and the global economy over time.

Comments

[carey_jim:]

A crucial part of the problem is that there is not much agreement about possible solutions and (therefore?) there seems to be a need to impose one (TARP) by decree.

There are underlying forces (facts of economics) but many theories to explain them.

At the human level this confusion of ideas manifests itself as panic, aggression and mindless group activities that sometimes get violent.

We need to keep our heads, both figuratively and literally.

2008 Oct 06 11:30 AM