Monday, September 29, 2008

Against the Bailout and alternatives

I wrote my congressman and let him know I opposed the bailout. For those of us old enough to remember the Savings and Loan crisis and the fallout, this latest financial meltdown was all too predictable. Just as predictable that Tom Menino will raise taxes by the maximum 2.5 percent each year and the real estate taxes will go up as well.

In 1993 I bought my first house during those tough economic times. I had to put $60K down on a building price of $160,000.00. With that kind of equity investment you have a real stake in your property. In 2006 I sold a condominium in the South End for 1.1 million dollars and the buyer only had to put down $50,000.00. I knew then that this easy money was crazy, and my partner and I cashed out and stopped buying property.

How is it that someone with only a liberal arts Economics 1 class could see this downturn coming but few others did? The simple answer is probably greed.

As "Zen and the Art of Motorcycle Maintenance" decried almost 40 years ago, there has been a loss of pride, of quality, of knowledge of excellence in this country. It has been replaced with the quick buck, the flashy car, entertainment news, and celebrity. Sarah Palin is the latest end result of this, but I fear worse could be forthcoming.

Here is a simple alternative to the 700 billion bailout. Treat banks as they treat us. Let the big banks which need money come to the citizens, fill out an application and be approved or declined on the basis of their assets, their credit history and their ability to pay. We can set up a blue ribbon executive committee with all the left, right, and middle. How about a board of Congressman Frank and Boehner, Senators Dodd and Gregg, Paulson from the executive branch, and maybe Warren Buffett, the mayor of NYC, and Senator Bernie Sanders to represent the People.

The banks can present their need for money, get terms from the Bank of the People, where we take equity positions, and they can make repayment terms. It would be transparent because they would have to fill out their applications showing all their assets, debts, income, etc.

Any comments on why this is any crazier than just handing over more than enough money to set up Universal Health Care in this country?

1 comment:

Chuck said...

I wrote to my Congressman Joe Barton to support the “bailout.” You know I am for the “bailout” because I am concerned that without it credit markets and confidence in the economy will seize up, possibly leading to a recession not seen in our lifetimes. Without a program to restore confidence in the markets, capitalism will take its natural course and lot more fortunes than the ones attributed to the financial players of Wall Street will be lost. Those causing these problems have already been punished, including Bear Stearns, Lehman Brothers, AIG, Washington Mutual, Countrywide, Merrill Lynch, and today Wachovia, one of our nation’s largest banks. The big brokerage firms which promoted the securities that have caused the problems are all gone as we know them. The 2 of the big 5 that “survived“ (Goldman and Morgan Stanley) are now becoming banks subject to higher levels of scrutiny and lower risk taking.

Regarding your plan, big banks already come to the people. Deposits are the biggest source from which they get money to supply loans and development and growth. That is why banks have faired better than the brokerages in this market: brokerages have to get most of their money from loans. Other sources for banks are investors via debt and equity. Most banks have had to increase their cash on hand by selling more stock. Most of the folks buying the stock are sovereign wealth funds, foreigners and Warren Buffet (he likes Goldman, assuming the package is passed). No need for an application: all of the info you ask for is already known via their financial statements which are available to anybody and reviewed and audited by the Federal Reserve and Office of the Comptroller of the Currency. Banks are the most regulated industry in the U.S., even more so than healthcare. Banks also can get cash already from the “Bank of The People:” They can borrow from the Federal Reserve’s discount window if they are really desperate.

The big problem is that the bonds which have been causing problems are widely held and those widely holding them are watching their values drop below any financial model they used to control their risk exposure. As the bonds drop, firms have had to write down their value depending on what accounting rules they follow. For banks and brokerages, regulations require them to maintain certain capital levels to remain in business and make loans, so as the bonds drop they have to raise more money to offset that drop, put simply. They also may have to stop making loans to support their capital ratio.

The solution proposed is to have the government buy those bonds at their current impaired market value because nobody else will and in size enough to save these institutions from further decline. By buying these bonds on the cheap, the firms affected will no longer see their values drop and can recapitalize themselves and, hopefully, begin lending again and, hopefully, avoid the worst case scenario. Meanwhile, the government holds onto those bonds and can decide when to sell them. Since they are buying bonds a big discount and since the government’s participation may help avoid a worsening financial situations, there is a good chance those bonds could increase in value. As a nation, our investment in our economy via this process could result in a profit. That is why this is not a “bailout,” it is an investment in our country.

My daughter Katie asked me this morning what started all of these problems and I told her it as a lot of things, but one if there was one thing that started the dominoes falling it might have been something that was meant to be a good thing, but had a detrimental result: Clinton’s desire to make housing affordable to everybody. Check out this prophetic article from a 1999 New York Times article:

BTW: if this had not been an election year, the deal would have passed already.