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Open thread on alternate plans
30 Sep 2008 07:59 am
A bunch of people are asking me what I think about alternate plans, but I want to make sure I've got them all so I can do one omnibus post. So if you want to ask "What do you think of X's plan", do it here.
The two I'd like to hear about would be 1) suspending/reducing capital requirements, and 2) suspending/modifying mark-to-market accounting requirements.
How about "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."
Picking and choosing banks to directly recapitalize with common/preferred equity. Setting up RTC2 for the rest.
An online article in the WSJ puts up a recommendation to handle the situation as Chile handled a somewhat similar crisis. Seems pretty sensible to me. Here's the link to the article
http://online.wsj.com/article/SB122265260912184329.html
I'd like to hear your take on it.
one of your readers put up this, also from the WSJ, the Jenkins "Plan":
http://online.wsj.com/article/SB122221420203869283.html
Here's my plan:
1. Take the $700B and divide evenly among all the primary residence mortgages in the US. The government has the information on the tax returns.
2. Let's say that it works out to $20,000 per mortgage. Take that and send it to the mortgage lenders in the appropriate monthly installments (if you have a $500 monthly payment, you get the next 40 months paid by Uncle Sam). That money will be tacked onto the end of your mortgage, but those payments will be made to the government.
3. Add on any little provisos you like, such as lenders have to make a good-faith effort to restructure the real problem mortgages; or, the money has to go to paying delinquent payments first, so that foreclosures are foreborne.
4. This should calm the stock market first, since the Fed is issuing a market-based "guarantee," and the credit markets second, since all the CDS's and other mortgage-backed securities derivatives should be back "in the money." Once they are, they can be unwound at a rational pace, and the winners can win, and the losers lose.
This plan would obviate the need for the previously-passed $300B mortgage assistance, so we're saving that money right off the top. It would certainly stimulate the economy, so we don't need to do that, either. It might even help the housing market, although it probably shouldn't.
Have at it.
How about giving money directly to American citizens so they can pay off their gigantic mortgages?
How about pooling together all income generated within the United States into a large government fund and then having a committe divide it evenly among the population?
My plan would largely be a continuation of the pragmatic plan we were operating under before the bailout talk.
1) Temporarlily insure money markets
2) Fed provide liquidity to overnight market by lending liberally on lower grade securities.
3) Handle bank financial failures as they arise. Essentially anounce that you will offer the AIG deal to anyone. If an institution gets in trouble try to work out a sale, if that fails guarantee liabilities, charge high rate on line of credit, fire management, get level of control of firm and get warrants in case there is a recovery. Wind down firm in orderly fasion.
4) Potenitally recapitalize FDIC to insure deposits. Allow FDIC to handle its banks.
5) Fed vigilant to combat deflation.
6) If at the end of the day the govt finds itself owning large amought of assets from this process. Then form RTC to dispose of these assets.
This seems to be a plan that sees where things go and does not have the all in nature of the bailout plan. Also it lets markets sort themselves out up to the point it is absolutely necessary.
This plan from Luigi Zingales was mentioned in another thread as a good potential alternate:
http://www.reason.com/news/show/129107.html
What about Nouriel Roubini's plan? He was calling this crisis long ago, he has (unfortunately) been right on the impact so to me he has credibility as someone we should listen to for solutions. In essence it is to use a TARP, set up a RTC like entity to take assets from failed banks, set up a RFC to inject equity in banks that can survive with it and work on restructuring mortgages for homeowers, as that is the underlying problem.
Here is the link
http://www.rgemonitor.com/roubini-monitor/253739/home_home_owners_mortgage_enterprise_a_10_step_plan_to_resolve_the_financial_crisis
Blackadder,
With all the claims made by the various talking heads about how this deal would be profitable for The Treasury, I have found curious that none have explained why your plan isn't actually better in the intermediate to long run.
However, I for one don't believe for a second that this plan will be profitable to the government, but will in fact cost a great deal of money if it is to serve it's stated goal of recapitalizing the banks.
I second the vote for lowering capital requirements on banks ala Arnold Kling:
http://econlog.econlib.org/archives/2008/09/my_talking_poin.html
Here is another one I just saw for an "interest rate buy down". It seems a little more dubious to me, but hey... you asked for alternatives:
http://foxforum.blogs.foxnews.com/2008/09/25/jpinkerton_0926/
In addition to Kling's plan (reduced capital requirements on go forward loans). Karl Denninger's plan seems sensible.
Going forward:
1. Level III assets must be fully disclosed along with all formula and models for their marks, quarterly, in the 10Q/10K.
2. Derivatives must all be moved to a regulated exchange with a central counterparty to guarantee margin supervision. No exceptions.
3. Leverage must be reduced to no more than 12:1 across the system. No exceptions.
For those firms in distress, unable to find a private source of capital, he suggests involuntary receivership (what sounds to me like an accelerated Chapter 11)in which equity is wiped out and bondholders become the new equity with a haircut to satisfy creditors.
Is it true that banks are paying out $40 billion in dividends and that stopping those payments would create hundreds of billions in lending capacity? If so, why can't they save themselves?
http://www.youtube.com/watch?v=zP7ZvzDqaTM
Temporarily suspend mark-to-market accounting rules for certain mortgage-backed securities and other illiquid assets.
This follows from:
1. The problem is an illiquid credit market...
2. ...caused by the mispricing of certain MBSs...
3. ...because mark-to-market accounting does not work when there is no market.
The Paulson rescue plan would work by creating a market for certain bad MBSs. The above scheme would allow companies to adjust balance sheets to the present value of the revenue streams on those securities (or some other fair accounting method). In this way, the credit markets themselves could figure out which players are safe and which are shaky. The safe ones begin again to lend to one another, while the losers liquidate or reorganize.
HOW TAXPAYERS CAN PROFIT FROM THE BAILOUT
Despite the public outcry over the bailout bill, taxpayers and the Treasury are likely to come out ahead.
Isn’t this better than screwing the economy and having to pony up for FDIC payments
The Bailout ( I don't think they marketed this correctly )
In my thinking, It’s a market stabilizer where assets are cheaply valued and Uncle Sam gets to buy them at 65 cents on the dollar
Plus could make 75 Billion over the next 2 years on yield spreads
Plus could stabilize falling home values thereby reducing mortgage defaults
http://online.barrons.com/article/SB122246748703380411.html?mod=b_hpp_9_0002_b_this_weeks_magazine_home_top
What do you think of Harvard Libertarian Economist Jeffrey Miron's plan of bankruptcy over bailout?
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview
I have a question/plan. If the problem is a credit freeze why doesn't the Fed just increase liquidity with interest rate cuts. If that isn't enough the Fed could purchase simple CD's in various banking institutions. Even banks that go out of business will get aquired by new banks or healthy ones. Why is simple monetary policy not enough here?
Boudreaux & Roberts at www.cafehayek.com
Three plans.
1) Jeffrey Ely's plan that Tyler Cowen discussed: Buy the homes of those about to default and rent them back to the current occupants at market rents. Of course, there's the fed gov as landlord problem. But, it could be done, though it'd take time.
2) Virginia Postrel's husband's idea: If the key here is to prop up the commercial paper market and make sure there is lending, then have the government act as an insurer of commercial paper for high-quality issuers, perhaps charging a couple of basis points for this service (sort of like MBIA did).
3) Sell CDS protection on ABX indices. This would allow the banks to hedge. The government could hedge its own exposure in some way. It might even get the repo market going, which I understand for ABS is completely dysfunctional at the moment.
I've watched this Harvard discussion regarding the financial meltdown a few day ago and it was... interesting...:
Robert Kaplan, Professor of Management Practice
Jay Light, Dwight P. Robinson, Jr. Professor of Business Administration and Dean of the Faculty of Business Administration
Gregory Mankiw, Robert M. Beren Professor of Economics
Robert Merton, John and Natty McArthur University Professor
Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy
Elizabeth Warren, Leo Gottlieb Professor of Law
After watching it I would have appreciated for somebody to state where the housing problems begins for individual mortgage owners and how to keep the banking system from collapsing and the long-term thread to non-housing non-banking industries. in my opinion, related yet different issues were not well defined and separated.
Of course common sense screams that one should make sure that housing assets are not burned further and that mortgages should be best re-negotiated before families declare immediate bankruptcy (even that is not always so)..
But I am not so much interested, at this point, in discussions regarding eg whether to give the lender or the borrower money? the answer to that is not the "mystery" or the "urgency" at hand to me but a question of specific context? where does housing start and banking end?
does the economy need the banking sectors as it were? while the modiliani-miller model states that equity is more expensive than loans... i think it was equity and not loans that created wealth in the US compared to other places.. VCs who created jobs that then could afford mortgages etc.
from an environmental point of view one can only be happy about a crisis that reaches beyond the finance sector and into real disposable income of families. as nobody wants to start initiatives on how production can get cleaner - at least we will lower consumption for a while?
but i doubt it... in respect to the economy it seems to me that the consumption patterns of say the average IT guy will not be affected enough to give the environment a mili-second break. his housing assets went down in half but his life-style does not change big time. He will still spend the same amounts on food, gadgets, hobbies etc? he would still buy the new iphone and eat burgers (but wait for that bubble to burst)?
non-financial non real-estate industries look strong in the US (not like during the Big Depression). With WalMart's operating capital they could afford cheaper loans than Chase!
but it goes without saying that we need the banking system to have some liquidity - but how much really? what would be the cost of doing nothing - so that we can start with a cost-benefit analysis? Right now the answer is that there is no answer as we do not know how big the damage will turn out to be... who wants to paint stormy, sunny, cloudy pictures...
stay tuned for drama as our story unfolds with more karma..
Seconded...
"2) Virginia Postrel's husband's idea: If the key here is to prop up the commercial paper market and make sure there is lending, then have the government act as an insurer of commercial paper for high-quality issuers, perhaps charging a couple of basis points for this service (sort of like MBIA did)."
The government sort of already does this through SBA loan guarantees.
Doug espouses the conventional wisdom: "Despite the public outcry over the bailout bill, taxpayers and the Treasury are likely to come out ahead.
In my thinking, It’s a market stabilizer where assets are cheaply valued and Uncle Sam gets to buy them at 65 cents on the dollar."
But I don't get it. Maybe someone here can help me understand. If the assets are such great investments, why do we need the Government to buy them?
I've yet to be convinced that somehow everyone else who might stand to profit from picking them up at "pennies on the dollar" is just irrational, whereas our sage leaders are the only ones with the foresight and wherewithal to make such a brilliant investment decision.
My Idea:
Do nothing to help financial institutions. For one year eliminate social security and corporate taxes. Pay for this by selling federal assets such as land and drilling rights.
Clay,
I don't have the best language to describe it but I think Brad DeLong's 'S' shaped demand curve probably does it.
Right now there's an equilibrium where assets are worth very little. It's not like an asset is worth $1 but the price is only $0.65. It's that assets are worth $0.65 UNLESS you want to buy $700B-$1T worth....then they will be worth $1 and you'll make money on the deal. But if you're doing that with $1,000, $100K, or even a Buffet like $5B that trick isn't going to work.
So some options:
1. Let the price stay at $0.65, hope the collapse doesn't leak into the 'real economy'.
2. Privately borrow $700B-$1T to make the play....good luck getting a car loan nowadays even with good credit!
3. Get a bunch of rich people together and do the $700B-$1T play. See #2, the big money is scared out of its wits.
4. Have the gov't do it by borrowing the $700B-$1T (since everyone's scared Treasury bonds will sell like hotcakes).
To me this seems the only way to make sense of the 'theory' behind the treasury plan.
I thought this was interesting:
....Axel Merk, manager of the Merk Hard Currency Fund, says the Paulson-Bernanke plan would do some good. It would "ensure our financial system doesn't melt down." But it's "an inefficient use of our fire power."
He proposes that the government leave the bad assets where they are and inject new capital into the banks, for which they would receive newly issued shares. That would give them new capital, which "they can leverage 10-1," Merk says.
The institutions wouldn't need to dump assets at fire-sale prices. They could hold them or sell them when the market improves. That's a better alternative, he says, than creating a new, politically charged bureaucracy to deal with them. If the institutions recover, taxpayers make money.
The problem with this plan, he says, is that it would dilute the ownership stake of existing shareholders, who include the top executives of the financial institutions, who would probably resist it.
The proposed debt bailout, he says, would not dilute them.
Sell the shit on ebay.
How about we ban McCardle from the internet and like-minded fear mongerers? They are doing more damage then anything else right now.
It's not like an asset is worth $1 but the price is only $0.65. It's that assets are worth $0.65 UNLESS you want to buy $700B-$1T worth....then they will be worth $1 and you'll make money on the deal. But if you're doing that with $1,000, $100K, or even a Buffet like $5B that trick isn't going to work.
This sounds less like a sound economic theory than a rationalization backed up by wishful thinking.
Draw a backwards S demand curveand normal supply curve. You'll notice that it can have one, two or three equilibrium points.
Why such a curve might come into existence is beyond me but I don't think it's theortically impossible. Also it does explain how assets can be 'stuck' in an undervalued position & how something like the Treaury plan could legitmately unstick them....but the 'market' would not.
The theory would seem to go something like this:
When demand is high the equil. point is high and slight movements look like your normal X shaped supply demand curve. When demand decreases, though, (say due to a sudden panic about risk and credit quality), the 'backwards S' piece of the demand curve now touches supply at two or more points. The day to day movement of price may center around any of those equilibrium points and appear rather normal but the situation is deceptively stable. Since there's more than one equilibrium point the economy can make a quantum jump from one to another. A jump to a low equil. point would represent a large contraction but wouldn't be corrected by new buying in the market because it is, in fact, a valid equil. point.
A small group of Democratic congressmen are circulating a plan among their Republican colleagues that has the following major components.
a:/ a freeze of all housing prices nunc pro tunc either to the estimated fair market value of March 31, 2007 or to the date of the most recent sale, plus 10%.
b:/ a government guarantee this price and will pay on account of any mortgages up to that level.
Assuming a house was worth $500 thousand on March 31, 2007; its value would be frozen at not less than $550. Therefore, if the owner in today's market seeks to sell it and can only get $400 thousand for it, the government will come in and pay up to $150 more to keep it at its fair market value.
This in effect solves the housing problem at much less of a cost to the taxpayer than any other proposal on the table. It provides homeowners with the equity which they can immediately access.
It provides the banks with a protection of their money at a known figure. It gives all the financial institutions a basis upon which to value their holdings.
How about the "House Republicans" plan, a.k.a. the "deadlock Congress" plan? How bad would it get if the only plans of action that actually enacted are:
1) The world's central banks keep trying to pump money into the system, as they are now, but get no additional help and stop with the bailouts.
2) To prevent a true Main Street panic, Congress raises the FDIC limit to $250,000 and gives the FDIC a blank check to protect individual depositors and ensure continuity of funds (i.e. the FDIC does whatever it has to so that no ATMs or bank branches or debit cards ever stop providing cash -- even the day of or after a bank's failure).
3) Duck and cover.
Worst and best case scenarios, please -- I understand this isn't an exact science, and I think it's important that we know what could happen, not just what you guess would happen.
Let the pieces fall where they may and pick them up afterwards.
Or, from a self interested PoV, expand the mortgage deduction to include principal as well as interest payments for 2009. That should be enough to recapitalize lenders.
This all brings me back to my original question: Why isn't simple monetary policy enough? Put more money into the economy and banks can lend again. The banks heavy on toxic mortgages will be at a disadvantage to ones light on it but the economy as a whole can recover?
To prevent a true Main Street panic, Congress raises the FDIC limit to $250,000 and gives the FDIC a blank check to protect individual depositors and ensure continuity of funds.
This is the type of bailout that ordinary people would support.
One more proposal: there's a distinction between the absolutely atrociously stupid banks and the naive banks.
The atrociously stupid like Merrill, Wachovia, and BofA were the ones who bought lenders at the peak and so are now holding some of the underlying bonds.
The merely naive are ones who thought that underwriting standards hadn't deteriorated and so were stuck holding on to senior and super-senior CDO tranches, which is where a lot of their exposure lies.
So, my modest proposal: screw the absolutely stupid banks (Wachovia and Merrill are already done for) and instead, have the government sell protection to the investment banks at fairly modest rates (below market spreads) to the banks on super-senior tranches.
Since super-senior tranches getting hit would imply a super-serious housing crisis, the government would likely not lose much money. It would prop up the merely naive banks like Morgan and Goldman and it would bring a more liquid and rational market (with tighter spreads) to the ABS CDO tranche market.
Let the free market decide.
Agreed, Boonton.
To me a combination of montetary policy, lender of last resort functions and ad hoc crisis management seems to be a more prudent approach.
I don't understand why this can't keep finacial meltdown at bay.
It probably won't keep us out of a recession or keep lending rates artificially low as they have been but it will combat the worst case scenario and allow the market to readjust as it needs to.
It probably won't keep us out of a recession or keep lending rates artificially low as they have been but it will combat the worst case scenario and allow the market to readjust as it needs to.
I think a large part of the problem with the bailout is that (AIUI) it's trying to avert not just the worst-case scenario but also the recession. And it seems to me that a recession is necessary. The financial system has become over-leveraged. That needs to work it's way out and bad debts need to be realized. It will be painful, but it becomes more painful as we keep postponing the day of reckoning.
Which is not to say that no intervention is necessary, but it should be focused on easing the failure, not simply avoiding it. The AIG intervention seemed a reasonable model. I don't see the need for the Fed to become the general buyer of last resort, and that strikes me as a plan that can have a much greater downside. I've heard numbers in the $10's of trillions on outstanding debt. If the Fed is a no-questions buyer of last resort, what happens when the Fed becomes illiquid? Given the magnitudes involved, it could happen.
Since you're asking for it, let me plug Plan Moldbug. (Use search to search down for "Plan Moldbug", then you can read the entire thing if you want; Moldbug is a wordy bastard.)
Of course, I hardly expect this to happen (nor does Mencius Moldbug). And if it did happen, it seems far more likely they'd just do part 1 (nationalization) and not do part 2 (sell off assets and create a free market). But I think it is worthwhile to stake out the best solution to a problem, if only to serve as a comparison for other solutions.Yes, that is how I understand it as well SG.
People (including Megan) are using threats of the worst case to talk us into something that is mainly aimed ad avoiding a recession and keeping some banks from failing.
To me if the worst case is really what you are trying to stop. There are much more targeted solutions that could be pursued. Many of which have been mentioned on this thread.
To me in a situation of great uncertainty it is best not to make big moves but instead to mind the downside and remain flexible as events unfold and you get more and more data. That seemed to be the Fed/Treasury posisition before the bailout and I thought it was a good one.
Why isn't simple monetary policy enough? Put more money into the economy and banks can lend again.
Boonton: Why would cheap money make bank XYZ willing to lend to Bank ABC if the former feared the latter's ability to pay it back?
Here's my question: why can't the government simply guarantee interbank lending on a temporary basis? This could be done with an aggressive auditing plan to quickly and efficiently go through the books of the country's banks to determine creditworthiness. Insolvent banks wouldn't get the guarantee, but would be liquidated or sold off or merged. I know this is an extension of moral hazard, but that horse has already left the barn. Moreover, I'd want it to be only temporary.
It seems to me this would break the back of the confidence crisis once and for all, and credit would ease again.
You'd still need major capital injections into the banking system, mind you. But I want to know why such a measure can't be one component in a bailout plan.
If the Fed is a no-questions buyer of last resort, what happens when the Fed becomes illiquid?
My guess: we'll all need wheel barrows to buy a loaf of bread.
A plan should deal effectively with all aspects of the problem, which go far beyond the mbs situation
1. Deal with the vacant housing problem
At the present time there are about 2.500 vacant houses, reflecting the overbuilding and the weakness of the economy. Until that surplus is cleared there is very little available to stabilize the underlying housing market. In the Midwest aggressive federally-funded demolition should be part of the plan; in the sunbelt there is need to allow owners to take tax write offs on the losses, so that house prices can be further dropped to clearing levels.
2. Provide tax code encouragement for private sector deals of the kind that the FDIC has just done with Wachovia and Citi, where distressed financial assets are further discounted in favor of an upside participation. I suspect that Lone Star and others would find such deals very intriguing.
3. Provide new bank capital,aimed at Main Street lending needs ( auto floor plans, inventory float, purchase loans,etc) on a reverse auction basis, with banks bidding to get federal investments in preferred stock,up to 20% of existing capital. Part of the problem with the existing bail out is the fact that no one knows what will be done with the liquidity provided. There appear to be no assurances that it will be aimed at Main Street lending, which as we all know is the bogeyman being set up for the citizenry.
4. Provide a special lending window, at risk-related rates, for the traditional industrial lenders,such as GE,CAT, and CIT,to assure that capital is available to finance industrial sales and capital goods acquisitions.
5. Create a special program aimed at a systematic reduction in oil consumption of 1 million barrels of oil a year for the next ten years, reducing our consumption by one half. This aspect of the program will have many benefits. It will reduce the long term price of oil and most likely the short-term price,freeing up consumer spending power. It will change the balance of payments structure substantially,as well as the balance of oil producer power. It will also change the employment picture at home.
The CNG conversions being touted may be the fastest way to achieve this,but there may be other ways as well. The CNG conversions offer the advantage of known technology,measurable price differentials on fuel,even in the long term, and employment of people now sidelined from the home and commercial construction markets.
This is a program that can be explained to Main Street. That,in the last analysis, is something that can't be done for the current bail out proposal. No one on Main Street has really seen their life disrupted. And most of the threats ( your payroll won't be funded, you won't get a car loan) just doesn't resonate in a world where the television ads still tout low interest car loans and most people get direct deposit.
OK, so here's a dirt simple alternative plan:
Borrow $300B in ten year bonds.
Deposit $300B at various banks by buying certificates of deposits with ten year terms.
At the end of ten years, the Treasury withdraws the CD's & interest to pay off the bonds. The cost of the program would simply be the interest difference between the bonds and CD's. If it's, say, 4% you're looking at a cost of just $12B a year. Even if you doubled it to the original $700B you're still dealing with a manageable expense of just $28B a year.
On the plus side banks get an infusion of $300B. They can issue new loans and lines of credit based on good risk profiles because they know the gov't isn't going to withdraw the money for ten years.
We know exactly what our costs will be. We don't have to try to figure out the true market value of arcane and impossible to comprehend assets. Also banks with fewer toxic assets would benefit more whereas under this type of bailout it would seem the messed up banks get more.
Yes some of those banks may still collapse but healthier banks will have more capital and can use it to pick up the slack. Also shouldn't there be a punishment for loading up your balance sheet with arcane and impossible to comprehend assets? To make a regular market in something you need standardization. If you craft lots of highly complicated instruments that are custom designed they should be almost untradeable in the market!
Boonton: Why would cheap money make bank XYZ willing to lend to Bank ABC if the former feared the latter's ability to pay it back?
It wouldn't by itself but:
1. With extra reserves coming in bank ABC would have less need of a loan.
2. With more reserves all banks will face building pressure to start making loans again otherwise they will not be able to pay on their deposits and the market will send money elsewhere.
There's a lot of emphasis on the demand for credit such as people seeking car loans and so on but it's easy to miss the supply. Every day cash is coming into 401K's, saving accounts, payments on credit cards, building up in cash positive firms, accumulating in China's central bank, the accounts of Saudi oil princes and even the quarters being put into washing machines at the local laundrymat . That cash wants to find a home to earn interest. The bailout plan essentially gives that cash a home in Treasury bonds while Treasury puts it into the banks. If the Treasury doesn't give that cash a home by borrowing lots of money the pressure builds for that money to eventually find its home somewhere.
Ok, I'm stupid...
Well, I'm not stupid, just not an economist.
I read that about 5% of the mortgages are currently in danger. Let the gov't buy those homes, and give them to disabled Iraqi vets.
Demolishing livable homes is beyond stupid.
Isaac's plan, now the DeFazio bill:
http://marcambinder.theatlantic.com/archives/2008/09/this_sucker_could_go_down_upda.php
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/26/AR2008092602200.html?nav=hcmodule
Let the FDIC handle it on the cheap.
Where's the moral hazard here?
I read that about 5% of the mortgages are currently in danger. Let the gov't buy those homes, and give them to disabled Iraqi vets.
Demolishing livable homes is beyond stupid.
There are 50 million mortgages in this country alone (the real estate problem exists in a number of European countries as well).
I doubt you'll find 2.5 million Iraqi war veterans total, let alone 2.5 million disabled vets.
The 5% number refers to the sub-prime loans, not mortgages in toto, so starting with 50 million is incorrect. Sorry, should have been more explicit.
Mosler Plan:
http://www.moslereconomics.com/2008/09/29/elaboration-on-the-mosler-plan/
1. Money fund issue:
Remove the $100,000 cap on insured bank deposits. This adds no risk to government. And it will eliminate the need for money funds which the cap created in the first place.
2. Broker/dealers:
Let them go. If they don’t survive, at worst their assets will be distributed by the bankruptcy court if it goes that far. They do nothing that I know of that serves public purpose and/or the real economy that banks can’t do. And the banks are already regulated and supervised.
3. Insurance companies:
Policy holders should be government insured and insurance company assets, and capital regulation should be updated. You will know insurance regulation doesn’t go far enough if there are too many government losses to make policy holders whole.
AIG got short credit (sold insurance on securities at low prices) and lost all their capital as risk and the price of insurance went up. Looks to me like a failure of regulation that allowed that much risk.
4. Home ownership:
Continue to fund the agencies via the Treasury to keep costs of funds at a minimum.
Have the agencies ‘buy and hold’ new originations, and thereby eliminate that portion of the secondary markets. The secondary markets serve no public purpose, beyond working past flaws in the institutional structure that should instead be addressed.
Increase and enforce criminal penalties for mortgage application fraud. Its functionally the same as robbing a bank.
5. Banks:
Lower the discount rate to the fed funds target rate and eliminate the need for collateral. This is how it should have been anyway.
Bank assets and solvency are already highly regulated, and how they are funded doesn’t alter the risk of loss due to insolvency for the government.
An interbank market serves no public purpose. Eliminate it out to six months by offering discount lending out to 6 months.
In addition to the FOMC setting the fed funds rate target, it can also set the rate for 3 and 6 month borrowing at the discount window. This both gets the job done and also replaces the TAF and TSLF type of experiments.
6. Growth and employment:
Offer (directly or indirectly) a Federally funded $8 per hour full time job to anyone willing and able to work that includes health care benefits. An employed buffer stock is a more effective stabilizer and price anchor. It’s also less costly in real terms, than the unemployed buffer stock we currently maintain.
Eliminate the various payroll taxes as needed to sustain demand.
Implement needed infrastructure upgrades and repairs.
Eliminate health care as a marginal cost of production. People aren’t more likely to get ill if they are employed; in fact, the opposite is likely the case.
The current system distorts pricing, and results in a suboptimal outcome for the economy’s ability to sustain prosperity.
Consider the implications of letting the remaining investment banks fail, and be absorbed by non-investment banks. The historical value added activity of the investment banker is no more. Today, these guys trade for their own accounts with leveraged assets and OPM. Would it really hurt the world economy to lose a lot of this activity? When giant institutions get into trouble with their model, a strong urge arises to engage in rent seeking behavior. This takes the form of lobbying and corrupt business practices. Instead of ending their business, I worry a lot of investment bankers morphed into rent seekers. What say you about this Megan?
What are your thoughts on John Hussman's "super-bond" plan? Here's my summary of it, but you ought to click the link to read it from him directly.
In his weekly market commentary published this morning ("You Can't Rescue the Financial System If You Can't Read a Balance Sheet"), John Hussman, Ph.D., of Hussman Funds opposed the Paulson rescue plan that was voted down by the House of Representatives earlier today. It's worth clicking on the link to read Hussman's lucid explanation of his position, but in summary, his objection to the Paulson plan is that if the government buys distressed assets at their market value, that won't do anything to boost financial institutions' assets, since the distressed assets should have been already written down to their market value. Hence,
Of course, if the Treasury overpays for distressed assets, there's less chance it will eventually recoup its investment in them. Hussman's preferred solution would be for the government to infuse capital directly into firms as needed, in the form of a "super-bond" senior to all of a company's existing debt but subordinate to customer liabilities:
Also, here's my plan:
A question a number of pundits have raised with the government's proposed solution bailout plan is this: How will the government determine the value of complex mortgage-backed securities it buys so it doesn't overpay for them*?
The government could offer to buy first mortgages for 50% of the face amount or 50% of the current appraised value of the underlying property, whichever is lower. The loans sold to the government would mostly be non-performing loans. The government could then write down those loans by 20% or 30% and try to get the delinquent borrowers to start making payments again. Whether they did or didn't, as long as real estate prices didn't fall another 50%, the government would eventual break even or better on the deal.
By putting a floor under the price of mortgages, this deal would, presumably, stabilize the market for mortgage backed securities and CDOs derived from MBS. If not, the same financial engineers who put the complex securities together could figure out how to unwind them and sell the underlying mortgages to the government. Since mortgages would be easier to value than the securities derived from them, the government would be less likely to overpay and more likely to turn a profit on the whole deal.
Entrepreneurs are already taking this sort of approach on a small scale, as I mentioned in a post last month ("Profiting from the Credit Crunch/Real Estate Bust"). I don't see why the Treasury Department couldn't scale up a similar approach.
Update: University of San Diego Law Professor Frank Partnoy proposed something similar in a New York Times op/ed published Saturday, "Buy the Loans".
*Some have speculated that the government intends to deliberately overpay for these assets, in order to infuse more capital into firms participating in the reverse auctions. If this is true, it's a bad idea. A better way to infuse capital directly in key firms, if it is needed, would be to take preferred equity stakes in them (along these lines, some pundits have asked why the government can't get a deal similar to what Buffett got with Goldman Sachs).
Aside from suspending mark to market, outlawing ARMS, and continuing to gush liquidity, couldn't Treasury provide mortgage insurance to every mortgage via Fannie an Freddie? The mortgage backed securities they underlie would instantly be AAA again. Fannie and Freddie could deal with whatever foreclosures and work to refi. at fixed rates where ever possible.
Is this proposal based on "net worth cerfiticates" by William M. Isaac (former chairman of FDIC) a reasonable alternative? The basics, from an column in Saturday's Wash Post:
"If we were to (1) implement a program to ease the fears of depositors and other general creditors of banks; (2) keep tight restrictions on short sellers of financial stocks; (3) suspend fair-value accounting (which has contributed mightily to our problems by marking assets to unrealistic fire-sale prices); and (4) authorize a net worth certificate program, we could settle the financial markets without significant expense to taxpayers."
Mark Cuban's suggestion - "If Treasury Secretary Paulson were to create an ETF to buy all the assets the bailout was planning to buy, along with all the warrants and shares of stocks in the bailout companies it can get, and then have any receipts generated by those assets, whether by sale, or regular income such as rent or mortgage payments or servicing them, go into the fund, I would buy at least $50,000,000.00 of shares in The Fund.
It would not be difficult to do. Whatever funding that the Treasury Secretary says is necessary for the Bailout would first try to be raised privately from other Funds and individuals by selling them shares in The Fund." etc
This is minor, but reducing the FDIC insurance from 100% of assets to 95% like Britain so that people defund irresponsible banks just for good interest rates but still keep their money in the banking system. It won't solve the whole problem, but it's an interesting suggestion.
Miss McArdle,
Others have plans. I stick to defining the problem.
Back in Oct/Nov. 2007, it had become clear that the world finacial system was in trouble unless the Western banks - European as well as US - raised more capital. It was also clear that the capital was there - in the sovreign wealth funds, China, etc.(often working through private equity, hedge funds, etc.) - to meet the demand. A rough guess at the amount needed was $400-600 billion. Over a full year, around half of that was raised. A good deal more was offered, but on terms the Westerners refused to accept (see Lehman Bros failure to accept help from the Koreans).
Without sufficient capital, banks will lend to one another only on penal terms. There lies our grand restriction of credit. And the perverse feedback is that the longer banks take losses due to these market conditions, the greater is the eventual need for additional capital.
Why did so many banks not raise the capital they would need? Three explanations have been current: hubris among Western bank chiefs, fear that shareholders would throw out Directors who accepted capital on the terms offered, and a prisoner's dilemma situation where the perceived best outcome for the individual bank is if others raise capital first. These explanations are not exclusive of one another. I would add to them that bankers feel safer (a desirable state) if others take action first (a dangerous condition).
The underlying problem is a mass of bad loans coming to light in housing, in personal credit and in corporate credit. That is usual (though the scale is unusual) at the beginning of any recession. The problem this time is complicated by the chopping and mixing of the risk on these loans in MBS, CDS etc. etc. If banks had more capital than they currently need to continue lending to one another, these bad loans could be worked through over a number of years. As it is, government money will be needed to sustain the work through process. That government money needs to be promised, but there is no way of rushing the work through process. There is time to work out how it can be best applied.
The question in evaluating the various rescue plans now on offer (including some of a quality which should shame the authors of the Paulson plan) is "How will this plan affect, in the short term and in the medium term, the creditworthiness of the financial institutions?" The question is more general than new capital provision; but new equity is likely to be a key part of a good answer to it.
Mosler's plan (above) is the only one that has a chance of succeeding, mostly because he's one of the few people out there who really understands the monetary system. But since the bozos we do have in charge (along with the academicas and pundits, bloggers, etc.) don't have any such understanding, we're marching full speed into Great Depression 2.0...
Repeal the CRA, so this is less likely to happen again. Restore transparency. Pass laws to ensure assessors are not beholden to financial companies.
How about some really ugly hard and involved work:
1. Make as much of the raw finance information as public as possible. Enlist the general internet to audit the specifics of every piece of every questionable asset in the entire economy.
2. Allow the alternatives to mark to market exist in a parallel, information-only virtual economy.
3. Create a common set of terms for legislation that offsets the profit motive of an organization that may expect assistance, perhaps as far as mandatory freezing of assets for a perhaps just mandatory auditing of all of a company's competitors as well.
4. Tie the values of all assets to the original service provider. Allow companies to disclose the entity that engaged the consumer on the deal, and specifically seize personal assets of current and past employees. Audit the very specifics of each deal, the employee's benefit, and sue accordingly. Hudreds of thousands, potentially, of small bankruptcies of individuals.
5. Establish a new corporation specifically designed to have a profit and loss machine that creates a market for economy stability (in some theoretical way).
6. Do nothing. I mean really do nothing, and get everyone on board to stop talking about it all so crazily. People may get back to just shuffling through things instead of making mountains out of molehills, and the whole thing might just slowly sweep itself under the rug.
7. Fix the credit bubble instead of just this minor problem.
A few completely stupid, crazy, ineffective ideas, but hey, may hopefully get someone thinking.
If this is truly a credit crunch affecting Main Street business then: for every financial institution regulated by the Federal Reserve that meets the current capital adequacy standards for its investment risk - lower its reserve requirements by half.
This does not save bad banks, it does not reward risky behavior. Banks that have adequate capital will be able to double the lending that their existing reserves will support. If the reserve requirement reduction is set for 5+ years. or until the bank fails to meet the capital adequacy standards based on risk, the bank will avail themselves of the opportunity to make more money but will continue to do so prudently.
If the goal of the bailout is also to restore the banks on the verge of failure then this will not be sufficient.
Simon Johnson, former chief economist of the IMF, and Peter Boone of the LSE present their analysis and plan at http://baselinescenario.com/baseline-080929/. Now that the Paulson bailout plan has passed, the main priorities are:
1. Increase confidence through additional steps such as blanket deposit insurance
2. A real bank recapitalization plan (not just the back-door recapitalization accomplished by overpaying for impaired assets)
3. Mortgage restructuring and other initiatives to cushion the impact of foreclosures (the provisions in the Paulson plan for homeowners are pretty weak)
4. Fiscal stimulus
Of course, regulation will have to happen at some point as well.
I ' m back from my holidays and i have some different views for these markets.
Many things happened during the last 3 weeks. I see that many of the issues that threatened markets are starting to go away. - oil prices reversed from 160 Usd to 110usd, giving some relief to consumers and producers worldwide; - us housing prices are expected to consolidate in a month or two; - eur/usd is getting closer to the purchase power parity.-Chinese economy is still strong and buying from several markets (including Japan!) . gold reversed to values below 800; What should one see in this picture? In my view, there are a lot of conclusions and investment decisions one can take looking to this scenario.
1. Invest USD in stocks related to American consumer: with lower gas prices and a historical low interest rate consumers will get more money to spend. The end of the housing prices free fall will be the trigger. Markets will only price this in the year end, but you should invest right now. Avoid stocks related to housing and financials as these will recovery slowly.
2. Run away from us exporters, but do not get short on it. World demand will still be strong. The same for energy stocks. I'm still expecting sustained oil prices in the next couple of years, now probably with a stronger us dollar and with nominal prices lower.
3. From the previous I’m still bullish in Canadian stocks and CAD, namely against euro and pound. Concentrate on sectors that will not suffer from the Dutch disease.
4. China and brazil will remain strong due to internal markets dynamics. Internal demand will boost imports and then helping to increase demand from external countries.
5. Euro zone and Japanese exporters will be among those who will benefit from the forex movements and an strong world demand. Investment in these companies in local currencies shall give you na extra return. If you are not na euro zone investor do not forget to cover your euro exposure.
6. I expect interest rates to increase in us, remain unchanged in euro zone and decrease in uk, due to different stages on the housing crises. I would be in position to get short on fotsie in pounds during the next 6 months because i expect retailers and financials to suffer even more.
7. I will repeat myself, but i'm really optimistic on the Japanese market. The increased demand coming from china may be exactly what this market needs to get in position.
These are my views. I hope that yours are different from mine. I expect to hear your views from your right now. Please send me any comment you wish.
What do you think of it?
(http://professor1x2.blogspot.com)
Laura Kauffmann
"Seven Oceans Investments Club"
I`am new girl on meganmcardle.theatlantic.com .Let's gets acquainted!
My name is Victoria.
Hi guys,
I recently registered to this forum and hope that somebody can
give me an advice on the forex market - I am looking for an introduction
for beginners. I have already a little knowledge about shares.
I have the expectation that the recent turbulences in the forex market promise
quick and easy money not only for the experts.
Thanks,
Jim