Jack & Jill Politics

Lord, have mercy. I look at the news in the morning and am shocked & appalled only to receive some fresh, terrifying and historic news when I take a look in the afternoon. (Thanks Eddie Griffin for the info below.) Hmmm…maybe John McCain should re-suspend his campaign since that was so incredibly helpful the last time. (eyes rolling)

…the Dow Jones industrials fell down nearly 780 points in their largest one-day point drop ever. Credit markets, whose turmoil helped feed the stock market’s angst, froze up further amid the growing belief that the country is headed into a spreading credit and economic crisis. […]

The Dow told the story of the market’s despair. The blue chip index, dropped by hundreds of points in a matter of moments, and by the end of the day had passed by far its previous record for a one-day drop, 684.81, set in the first trading day after the Sept. 11, 2001, terror attacks.

The selling was so intense that just 162 stocks rose on the NYSE — and 3,073 dropped.

Nancy Pelosi read the administration and the Republican party in general the riot act this am in a very effective speech. She sounded uncharacteristically nervous but angry as hell — I’m angry too that Bush’s disastrous policies turned Clinton’s projected surpluses into the crisis we are experiencing needlessly today. (transcript here) She’s right — the party is over.

Congress responded to a true grassroots outcry from Americans who think handing this administration – the architects of this mess – $700 billion with little plan or oversight is a really bad idea. According to McJoan, calls to congressional offices were 100 to 1 against the plan. Finally America stands up to George W. Bush and says no.

I’m definitely no economist. However, here are some alternative approaches that I’ve heard to the laughable ridiculous plan that the Bush administration tried to sell the American people. What do you think? Read em after the jump and evaluate em in the comments.

First suggestion: How about using some of that original $700 bil to shore up the FDIC? Cuz uh – in case you might not have guessed this, the Bush administration has failed to make sure the critical FDIC is capable of handling this crisis.

Via Bloomberg (emphasis mine):

By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.

“It’s not going to be Armageddon,” says Mark Vaughan, a financial economist at the Federal Reserve Bank of Richmond, Virginia and a senior lecturer in economics at Washington University in St. Louis. “But it’s going to be bad.”

FDIC’s Secret List

The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won’t disclose their names because doing so could cause depositors to panic and pull out all of their funds.

It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue by lending money to the FDIC.

[…]

Emergency federal lending to the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion — not including the $700 billion general Wall Street bailout now under discussion in Congress. Under federal statute, the FDIC must pay back any loans from the Treasury.

That number would be even higher if the government were on the hook for uninsured deposits — which amount to $2.6 trillion, 37 percent of the total of $7 trillion held in the U.S. branches of all FDIC member banks.

From Ian Walsh of FireDogLake:

1) Buy up mortgages at a discount and give people new fixed rate mortgages. The government shares in further house appreciation (only fair since it bailed the homeowner out). This stabilizes mortgage prices and helps people and banks both. It is essentially identical to what FDR did with the Home Owners Loan Corporation (HOLC), and we know how to do it. Initial price tag? Probably around 20 billion.

2) Use the FDIC (the folks who take over failed banks) to take over failed mutual and money market funds, make sure the investors get as much money back as possible, liquidate the funds in an orderly fashion (or keep them operating if necessary) and if they are kept alive, kick the people who screwed them up to the curb and change how they do business.

3) Declare a national emergency, with judicial review (unlike Paulson’s seizure of ultimate power) and use the authority to review all purchases of banks, to institute oil rationing if necessary (or simpler procedures like “every street now has a 55 mile an hour speed limit, if it is normally higher). Also allows release of oil from the reserve, if necessary.

4) Expand the safety net such as food stamps, employment insurance, welfare and so on. We know this is going to get worse no matter what we do, so why aren’t we taking care of ordinary people?

Via my friend Benjamin Crandall:

The problem with the Paulson Bailout plan is that it rewards the reckless lenders at the taxpayers expense, cheapens the dollar, raises Treasury bond interest rates, and does nothing to solve the underlying problems.  Paulson’s plan is to take from the taxpayer and give to the same Wall Street banks that got us into this mess in the first place.  The only way his plan will save these banks will be to pay well above market value for the toxic loans it buys.  But no one even knows what fair value is for this debt, especially not Secretary Paulson and Chairman Bernanke.  They didn’t even realize how big this problem was until this month.

Many economists have been warning about this disaster in the making for years.   Unfortunately, the economists who saw this coming aren’t being consulted on how to fix it; economists like Nouriel Roubini, Michael Shedlock, Dean Baker, among many, many others.  People who thought the “fundamentals of the economy are sound” just a month ago cannot be trusted today to accurately predict how low home prices will get, how many homes will be foreclosed on, how many bankruptcies will occur, how low US tax revenues will get, or how high unemployment rates will go.  Paulson’s plan almost guarantees that the US Government will pay too much for these toxic loans and the taxpayer will be stuck with a $700 billon bill without solving the underlying problems.

Alternative 1:

The real problem is not whether or not these reckless banks go out of business.  There are plenty of banks and credit unions with solid balance sheets that will continue to lend.  The problem is a systemic lack of short-term liquidity.  The commercial paper (CP) market is frozen and business are struggling to meet their short term credit needs.  So an extremely effective alternative would be for the US Government to lend directly to financially sound businesses through the short-term CP market.  This strategy would keep credit flowing AND earn a respectable rate of return on investment for the US taxpayer.  This alternative is guaranteed to help the underlying problem and puts very little taxpayer money at risk.

Alternative 2:

Instead of just handing over cash in exchange for toxic or even worthless loans, we should re-establish the Great Depression era Reconstruction Finance Corporation (RFC) and make senior preferred stock investments in banks (with the taxpayers owning the preferred). This would help the banks recapitalize, and punish the existing shareholders by diluting their shares.  It is in the public interest to make sure the banks continue to lend to credit worthy customers. But it is not in the public interest to protect the management and shareholders of these institutions. Over time this preferred stock would be sold on the public market. The RFC was one of most successful programs of the Depression, and has been praised by many economists including Milton Friedman.

Either one of these two alternatives would be vastly superior to the current bailout proposal.  Used in combination we could address the immediate crisis, without bankrupting the Treasury. It is essential that we do not put too much taxpayer money at risk now because we may need that money to help create jobs as the recession deepens.  When the time comes, that money should be spent on infrastructure improvements, solar and wind energy development, and electric car development which will create lasting American jobs and wean us off of foreign sources of energy.  If we waste $700 billion on this reckless Wall Street bailout, the dollar will be worth much less and Treasury yields will go through the roof, making it fiscally difficult or impossible to stimulate job growth later when we need it.