Experts eye alternatives to bailout approach

[ZebuluniteV]

link

I saw this list of 4 solutions proposed as alternatives to the bailout plan by Paulson. While I'm by no means an expert on the financial system, as a taxpayer I have little interest in paying for a massive bailout of corporations who, combined with conservative administrations, have long flouted government regulations. Of the 4 proposed plans, I like the first, where the government would lend money to banks as an alternative to taking on bad debt, the best, as it would provide banks needed credit while avoiding both the moral hazard problems of a bailout and doesn't commit the American public to purchase a bunch of garbage loans. Below I quoted what was said about that approach:

Critics of the administration's plan argue that an alternative could be crafted to minimize the exposure of the government -- and taxpayers -- to risk. Johnson, the MIT professor, suggested that the government, instead of taking on the bad debt, could offer loans to troubled banks, allowing them to put up their sickened portfolios of mortgage-backed debt as collateral.

This would give the banks access to badly needed cash at attractive interest rates set by the government. But it would not completely let them off the hook for making those bad investments in the first place. Because government money would come in the form of loans, rather an outright purchase of the risky investments, taxpayers would be offered greater protection. Ultimately, the banks would have to pay off the loans and take back the securities, though at a time when the market for them may have improved. If the value of the securities is still depressed, that would be the banks' problem, not the taxpayers'.

"The risk to the government/taxpayer is that the bank goes out of business and so isn't around to settle up," Johnson said. "But the government is also the regulator, and they can do a more forceful job of making sure the banks have enough capital, so the incentives are pretty well aligned."

Interest rates would be set at a level attractive to banks, the relatively low rate at which the Treasury borrows plus a small premium. Only if the banks were nearing default would the government take a more active role in propping them up, perhaps even taking them over outright.

 

[Craig234]

'Experts proposing alternatives to Paulson's plan' is *exactly* what I want to see Congress look at right now.

I don't think 9/11 was caused by the Bush administration, but we let it have the unique effect of giving the floundering Bush enormous political capital and setting us on the road for the terrible Neocon policies that they had standing by to rush into the public policy the moment it happened, waiting for such an event.

When they sent 'shock and awe' to Iraq, it wasn't just military, they had elaborate plans for forcing far right Milton Friedman economics on the nation of Iraq in the chaos.

I don't want to see the huge policy now that will effect the nation for decades passed in the panic of a few days coming from this group of Wall Street careerists alone.

 

[Thump553]

Hasn't this already been done, with the opening of the federal discount window to nontraditional recipients like investment banks? Remember too that discount window rates are pretty rock bottom as well.

 

[smack Down]

No, No, No. Stop throwing good money after bad. Giving failing banks money does nothing but lets them live a little longer.

 

[sandorski]

Any such Plan should wait for the next President. Bush is an utter failure and looking for redemption. I kinda doubt his Trail of Fail is going to end when he's just grasping for straws. Then there's the kind of shackle that a huge $700 Billion Program poses for the next President.

 

[Xavier434]

Ya, I read that this morning. I do like the government lending idea. At least, I like it more than the current bail out bill.

No matter what we do though, it needs to include problem prevention for the future which none of the solutions truly address. We need to go back to proper regulation that was working before the nonsense that was pulled in the 80s.

 

[BeauJangles]

Originally posted by: smack Down
No, No, No. Stop throwing good money after bad. Giving failing banks money does nothing but lets them live a little longer.

If the government can help them raise equity or reduce their debt, it can easily put them all on an even keel again.

The reason it is worth discussing is because there are other, alternative plans, that would be far less up-front money and not require the government to absorb so much risk.

 

[ZebuluniteV]

Originally posted by: Xavier434
Ya, I read that this morning. I do like the government lending idea. At least, I like it more than the current bail out bill.

No matter what we do though, it needs to include problem prevention for the future which none of the solutions truly address. We need to go back to proper regulation that was working before the nonsense that was pulled in the 80s.

:thumbsup: :thumbsup: :thumbsup:

That can not be empathized enough. Were it somehow not clear after Enron and other scandals, it is painfully obvious at this point that the extreme deregulatory policies pursued so far largely by conservatives/Republicans (and to varying extents libertarians) have been extraordinarily disastrous to the US economy.