Thursday, September 25, 2008

Proactive Thinking

James Galbraith has an article in the Washington Post this morning, A Bailout We Don't Need, going into detail on how we don't have to engage in any Hanky Panky to address the financial crisis because it is fundamentally a crisis of confidence, but we do have to address the real structural deficiencies that have led to the discomfiture of the privileged because of the misery of the many. We need an FDR response:

Now that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises.

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

With this solution, the systemic financial threat should go away. Does that mean the economy would quickly recover? No. Sadly, it does not. Two vast economic problems will confront the next president immediately. First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won't be enough. ...

The second great crisis is in state and local government. Just Tuesday, New York Mayor Michael Bloomberg announced $1.5 billion in public spending cuts. The scenario is playing out everywhere: Schools, fire departments, police stations, parks, libraries and water projects are getting the ax, while essential maintenance gets deferred and important capital projects don't get built. This is pernicious when unemployment is rising and when we have all the real resources we need to preserve services and expand public investment. It's also unnecessary. ...

Next, let's think about what the next upswing should try to achieve and how it should be powered. If the 1960s were about raising baby boomers and the '90s about technology, what should the '10s and '20s be about? It's obvious: energy and climate change. That's where the present great unmet needs are.

So, let's use the next few years to plan, mapping out a program of energy conservation, reconstruction and renewable power. Let's get the public sector and the universities working on it. And let's prepare the private sector so that when the credit crunch finally ends, we'll have the firms, the labs, the standards and the talent in place, ready to go.

Some will ask if we can afford it. To see the answer, don't look at budget projections. Just look at interest rates. Last week, in the panic, the federal government could fund itself, short term, for free. It could have raised money for 30 years and paid less than 4 percent. That's far less than it cost back in 2000.

No country in this situation is broke, or insolvent, or even in much trouble. For once, Wall Street's own markets speak the truth. The financially challenged customer isn't Uncle Sam. He's up on Wall Street, where deregulation, greed and fraud ran wild.

Shorter Galbraith: We do not need to follow the irresponsible and greedy response put forward by the Bush administration. We need to do what is right by the country, not hand over the public treasury to Wall Street so they keep their profits and the rest of us pay for the swindle. The country has greater needs than making sure Bush's base is protected.

Hello? Are there any Democrats left in Congress?



The Red Queen said...

I'm a giant fan of the Galbraith family. James' father, John Kenneth, was they guy FDR used to implement Keynesian policies during the new deal. The plan James puts forth makes more sense to me than anything else I have heard.

jangles said...

Why does P. Krugman see a need for a carefully structured bailout? Hillary Clinton? When I try to sift through all that has been written and said about this, I think the general consensus is that an intervention is needed but the Bush proposal submitted to congress did not have provisions to protect taxpayers, to structure competent oversight. Those seem to me to be items that are being addressed and worked out through initiatives proposed by HRC and others. I also trust Warren Buffet who says we need intervention and has put forward his own support with 5B $ but stressed the need for government run market stability/liquidity.

daily democrat said...

I was under the impression that the US government did not have enough resources to pay for the things we citizens healthcare, social security, education, infra-structure, national security, disaster relief, childcare, veterans benefits, environmental projects, even military supplies...the list is a long one. So how is it that we suddenly have an extra 700bn to pay for anything? Even if the US gov't HAD the money, which it clearly doesn't (and probably won't) doesn't the phrase "Don't throw good money after bad" come to mind?

Why do so many believe that our government should attempt to restore "consumer confidence" in such a clearly disastrous system?

scott said...

Unless there's significant mortgage relief along the lines of the HOLC proposal that HRC and others are floating, let's just say no deal. Because the alternative is relief for Wall Street and none for anybody we actually give a damn about.