An Alternative Plan for Fixing Credit & Housing
Bill King, who I have quoted many times in this space, puts forth an intelligent alternative to the two plans circulating D.C. -- the DOA Paulson Bailout plan, and the even sillier House Republican Plan.
I would strongly suggest the economic staff of both Presidential candidates review this.
Here are Bill's starting premises:
• The US credit system is broken.
• The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
• It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
• The Wall Street model, securitization and extreme leverage, is obsolete.
• US financial institutions need to recapitalize.
• Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
• Paulsen and Hank's bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would've retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
• It's wasteful & foolish to put more money in an obsolete non-functioning system
• Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
• If you want to get money to the consumer: the less middlemen, the better.
• Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.
Basics of the King Report Bailout Plan:
• Directly recapitalize banks by the US government allocating $500B into a plan for community-type banks to increase their capital in partnership with the government.
• The government would match existing or some percentage of existing bank capital. If it would be better, a separate bank could be created. Place a limit of say $1B per bank.
• This would create $5 trillion of credit at conservative 10 to 1 leverage. This is more than the entire private mortgage market. It is a much better use of capital instead of absorbing $700B of losses with
no means to discern resultant credit creation.• Give the banks a tax rate of 15% on consumer and commercial lending for 5 years and the right to buy out the government share of the operation at some premium.
• Only banks that meet some metric, like a Texas Ratio of 50, are eligible.
• To help the big banks, allow them to create a consumer & commercial lending facility with the 15% tax rate benefit. This should entice private equity and sovereign funds as well as Wall Street remuneration that was garnered over the past decade or so.
• Prohibit trading, especially derivatives, in consumer & Commercial lending operations. However pure hedging would be allowed.
• Immediately increase FDIC-insured bank deposits and money funds to $1 million per eligible account.
Further considerations:
• Foreign banks in the US could be included if they have respective funding from their government.
• The real estate problem is due to the fact that American incomes do NOT support current prices. Easy credit allowed them to purchase homes they couldn't afford.
• Any solution to clear the real estate market must entail hiking income, which is very difficult, or allowing prices to drop to levels that the average American can support. This helps average Americans, not the big banks and investors stuck with overpriced mortgages.
• No bailout for the imprudent and reckless but a means to directly help Americans and procure capital from private and sovereign sources because a new financial system must be implemented.
• This is not likely to be the final model but it is a stop-gap measure that will resonate with average Americans. It's a way to connect with Middle America because it benefits them directly and is not an exclusive Wall Street bailout.
• The cause of our current financial morass is Big Government + Big Business = Crony Capitalism + Funny Money = concentration of wealth and risk + declining US living standards.
• The solution is decentralization of the financial system, like the tech industry, which will lower systemic risk, foster competition and yield better ideas, services and companies.
>
Thanks, Bill -- great stuff.
Friday, September 26, 2008 | 06:30 PM | Permalink
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I find this important enough to share:
(In Businessweek on line):
...We at Action Economics will keep our third-quarter GDP growth forecast at 1.7% until the Sept. 29 release of the August personal income report, though there is downside risk to our estimate from the lower service consumption trajectory in the second-quarter GDP data.
Estimate Knockdowns
The economy is now entering the fourth quarter on a particularly weak footing, with notable downside risk from our 0.6% GDP forecast. A negative headline GDP reading in the fourth quarter would almost certainly mean that the National Bureau of Economic Research (NBER) business-cycle dating committee—the body that is the more or less official arbiter of U.S. recessions—will back-date a recession to the start of 2008, despite the notably positive growth rates in the second and, likely, third quarter as well. The data in the August income report, as well as the evolution of events in the markets over the next few business days, might well knock down our fourth quarter GDP estimate enough to make it more likely than not that all of 2008 will meet the NBER's recession criterion."
....
Posted by: In cash | Sep 26, 2008 6:40:44 PM
Great stuff. Too bad this plan will only be tried after the first $700 billion is wasteed
Posted by: Dan | Sep 26, 2008 6:41:27 PM
And to summarize even more, "Main street can survive WITHOUT Wall Street; however, Wall Street can NOT survive without Main Street!"
Posted by: Rob P | Sep 26, 2008 6:45:15 PM
Fantastic.
Start new clean banks, and flush the insolvent ones (Wachovia is already about to join the Dead Banks Walking). The new banks can begin to lend to sound businesses. Let housing fall to the point where average Americans can afford to buy.
If only someone would actually listen to this..... we know that the most likely thing is they will try to save the system and only adopt this clean bank solution once they have wasted a lot of money and failed.
This clean slate solution is a bit like those historical episodes of hyperinflation where the old currency was irretrievably ruined, so they simply wrote it off and began again from scratch.
Posted by: leftback | Sep 26, 2008 6:49:58 PM
Good plan, the only thing I disagree with is upping the FDIC insurance to 1 million per account. One of the theories I heard about the S&L implosion was the increase in the limit from 10K to 100K encouraged Bankers to take more risks.
Posted by: Dervin | Sep 26, 2008 6:59:03 PM
This is a much better plan than helicoptering down Wall St. dropping bales of money on to the roofs of banks.
The Paulson plan can't solve the problem. It can only put it off for six months (which probably makes it a good enough plan for Paulson).
Stealing money from Main St. to give to Wall St. will not allow people to make payments on overpriced mortgages. And unless people can buy the houses and pay the mortgages, the derivatives are worthless. Which means we will be buying worthless assets at a huge price.
Posted by: VG | Sep 26, 2008 7:02:46 PM
Of all the plans I see, I like this one by James Galbraith posted (only?) in the SL TRibune
http://www.sltrib.com/opinion/ci_10559870
Posted by: Edie Trimmer | Sep 26, 2008 7:03:43 PM
Of all the plans I see, I like this one by James Galbraith posted (only?) in the SL TRibune
http://www.sltrib.com/opinion/ci_10559870
Posted by: Edie Trimmer | Sep 26, 2008 7:05:06 PM
Bill King's outline makes a lot sense. The current 'Kobayashi Maru' scenario we find ourselves in just might get reprogrammed IF we can get the numb-nuts in Washington to do what is right-- instead of what is expedient. Yeah, I know....I laughed out loud too. But, we MUST get them to follow the people's lead here or you can stick a fork in the US.
Posted by: Unscripted Thoughts | Sep 26, 2008 7:08:29 PM
Barry,
Let's say there is no bailout. Then a series of banks anounce they are going under and lets say China step in and buys half wall street with its 1.5 trillion dollars in reserves. Politics aside, that will be it. Am I wrong?
Posted by: Pablo | Sep 26, 2008 7:09:23 PM
Investment bankers are an endangered species, deservedly so. However, if you would still want to observe some in action, you can go to the government preserve called the United States Dept. of Treasury. The leader of the pack can be seen there trying to ply his old ways at the taxpayer's expense.
Posted by: Jason | Sep 26, 2008 7:09:39 PM
Great but non-implementable idea: there are no lobbyists paying for it.
Paulson Plan: saves the money senders that crawl through the halls of Congress, leaving trails of slime in their wake.
Winner and Still Champion: Money & Power.
Loser: Reason
Posted by: Winston Munn | Sep 26, 2008 7:11:58 PM
I wrote to Congress expressing my opinion and this is the response I receive from most:
" This is an automatically generated Delivery Status Notification.
Delivery to the following recipients failed permanently:
* senator@sessions.senate.gov"
Or this:
"Thank you for contacting Senator Tim Johnson’s office.
Due to the high volume of email traffic our office receives, we no longer accept incoming email."
So much for representative democracy. We represent you and don't give a flying flip what you think. Your Congress.
Posted by: me | Sep 26, 2008 7:12:27 PM
Shear brilliance, and hence no chance of being adopted.
Posted by: john east | Sep 26, 2008 7:15:51 PM
It's nice to fantasize about solutions but his plan is also:
1. Expensive ($500 billion would be at the low end, particularly after the FDIC takes over many banks)
2. Would not satisfy the "freemarket" conservatives who take no rfesponibility for their lack of responsibility.
3. Somewhat naive in this global environmment. We could include foreign banks. Hell yes we would as soon as they start selling Treasuries.
Posted by: larster | Sep 26, 2008 7:18:59 PM
It sounds like a great plan to me, but will it work ? I'm too ignorant on the particulars of a credit crunch to even begin to understand how you solve one. My ideals are in line with his, however:
1) The citizens and taxpayers come *first*.
2) We need to start *now* to future-proof our banking system against this type of issue. Just like our communication systems are today, our banking/finance and energy systems must also decentralize in order to develop redundant and fail-safe operations that are resistant to massive failures.
Posted by: OhNoNotAgain | Sep 26, 2008 7:23:55 PM
The Paulson Plan to me sounds like the Super-SIV debacle...or the very financial alchemy that contributed to the MORASS. They are trying to tell us that the whole financial system is about to collapse...yet if we shuffle bad paper from one desk to another, we are back in the business of America!!! NOT.
BTW, I was anxiously awaiting to see the short interest levels in the most recent report...as of 9/15, before the ban even took place, the short ratios on all the big nasdaq names and key financials such as C, GS and JPM were already at really thin levels...by now they must be so low, as to offer ZERO backstop to these stocks.
Posted by: Steve Barry | Sep 26, 2008 7:25:40 PM
King's plan looks good. So look many other plans. So why is Paulson's and Bernanke's plan so poor? I believe that they sketched it in a hurry. And that amazes me. Did they really executed their office without a worst-case-plan for the financial crisis? Sadly enough, that seems to me be the case.
Posted by: Our man in Helsinki | Sep 26, 2008 7:25:46 PM
Where's Jay? This is what he and I were kinda sorta advocating a few days ago -- get ourselves a new balloon....
This actually follows the Schumpeter "creative destruction" model to some extent. The destruction has happened, but the markets can't fix themselves on their own. Hence the role for the govt.
All that said, though, I do think Pablo has a point above. I don't know how much of a problem that really is, perhaps someone can weigh in.
Posted by: Whammer | Sep 26, 2008 7:29:44 PM
Larry Kudlow just put up the Dow Futures...up 129!!!
Larry needs to be studied at the University Level..what moron thinks Dow futures mean anything at 7:30 on a Friday night?
Bob Froelich loves financials...what a surprise.
Posted by: Steve Barry | Sep 26, 2008 7:34:25 PM
upstream it was commented:
One of the theories I heard about the S&L implosion was the increase in the limit from 10K to 100K encouraged Bankers to take more risks.
all i would say is, isn't the purpose of regulation to prevent risk taking, and if we re-imposed regulations wouldn't that eliminate the problem except in the case of criminal activity?
Posted by: dan | Sep 26, 2008 7:41:18 PM
According to this article in the Washington Post, community banks are doing very well and don't seem to need a lot of help.
Are there any reports that could provide a broader view of what is happening at the community bank level? Do they really need to partner with the feds, or would the natural shift and growth in deposits and lending accomplish the task?
Posted by: Dogwood | Sep 26, 2008 7:41:50 PM
I have heard several times now comments to the effect that "Wall Street as we know it is gone" -> i.e. the leveraging, the too big to fail, etc. I just don't see how that's going to change unless some laws are passed.
We had the S&L crisis in the 80s, people probably said after that "never again"< then LTCM in the 90s. once again, a crisis that was probably considered the crisis to end all crises. Now this whole debacle, which is even crazier because we all got to watch it happen - which of us didn't think liar loans and the explosion of credit weren't going to lead to problems? I am skeptical that safeguards are going to be put into place.
Furthermore, we are watching a shakeout and consolidation right now, with even bigger "to big to fail" companies emerging. What a wonderful business model!
Posted by: Todd | Sep 26, 2008 7:46:04 PM
I have not seen that little blond girl running across Larry Kudlows TV screen lately....
Posted by: catch-22 | Sep 26, 2008 7:51:28 PM
I don't watch Larry, but I did spot Vince Farrell the other night eating on 3rd Avenue in the Stargate Diner. I guess CNBC doesn't pay very well, or his market calls haven't worked out too well.
Hedgie watchers may be interested to learn that some big names in the hedge fund arena have been struggling. SAC is down 5% on the year apparently, which means that although Stevie Cohen has a shitload of traders and computers down there by the Sound, I kicked his ass, armed with a laptop and this blog, as did most of the traders on TBP, I would imagine. Sweet, eh?
@ Steve Barry:
I have been thinking about the lack of shorts in the market as well lately. After the congressional charade is finally over with and we have had a rally to get Larry and Dennis excited, we might find even more shorts driven out of the market. So I think it won't be long before I may go all-in QID with you.
Posted by: leftback | Sep 26, 2008 7:52:59 PM
