Thursday, September 25th, 2008

James K. Galbraith :: We Don’t Need A Bailout

Here is economist James K. Galbraith in the Washington Post with some wisdom for the next president.

He asks this: Why try to save investment banks when the sector is pretty much gone?

His alternative? Strengthen the banking system through the FDIC, and save the folks who have been all but abandoned in this crisis from jump: besieged homeowners.

Here’s an excerpt:

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. …

A voice of reason amidst the madness.

posted by @ 7:46 am | 6 Comments

6 Responses to “James K. Galbraith :: We Don’t Need A Bailout”

  1. andy says:

    Doesn’t it seem like the urgency hype is a diversion to slide through a jury-rigged piece of legislation which I fear may ultimately favor the interests of the financial community over those of the average tax payer? I am skeptical as to how our buying bad debt at or below their true market value will provide any meaningful and sustainable longterm economic relief, particularly since I don’t expect housing prices to “rebound” without the egregiously indiscriminant availability of subprime mortgages.

    Seriously… if it took a couple years to even recognize (ie, acknowledge) that we were in such a financial crisis, I can’t see how spending a few extra days on weatherproofing a plan works against the interests of the general public.

  2. Zentronix says:

    That’s what I’ve been wondering myself.

    I think there’s much to recommend Galbraith’s plan.

    The House Republicans’ plan was sort of the mirror opposite of this–guarantee the mortgage debt through forcing the companies to buy insurance. It would allow them to say no taxpayer would be at stake–although in fact there would have been significant risk to taxpayers at the back-end if defaults continued to mount.

    What’s interesting is that Paulson and crew denied the House Republican plan–and I assume they never seriously considered this one because no Democrat was really pushing it–because the problem Paulson said they were actually trying to solve was liquidity, the tendency of banks to hoard money right now rather than lend it.

    First, that shit is ironic. Paulson is having to go back to the kinds of economic policies that the Democrats used to get out of the Depression. But he’s trying (badly) to dress them up in conservative terms. That’s why the House Reeps revolted.

    Second, if the Dems had some nuts, they would really be moving toward getting us out of the same policies that led us here over the past 30 years…

    Man, I could go on.

  3. Zentronix says:

    clarify, Paulson’s going back to regulation of the size and scope that FDR and the Dems were pushing back then. Of course, the mortgage support programs that were part of the New Deal looked nothing like the bailout.

  4. andy says:

    Speaking quite frankly, I don’t really trust that legislators from either party know what needs to be done. The grim reality is that most of them don’t truly understand the complexities of Wall St – and we’re talking about all facets ranging from the financial instruments themselves to the culture and inner workings of the financial community. Paulson should have the perspective, but there’s too much history that would presumably bias him toward striking a deal beneficial to the finance community over the average schmuck who’s having trouble making mortgage payments. We really need guys like Buffet and Bloomberg doing much more than advising.

    Given the culpability and ineptitude of both parties with regard to this mess, I’m also appalled by how much both sides are trying to blame the problems on each other. I recognize the motivation transcends the issue of the economy alone, but it’s still quite annoying to me. When the entire food chain down to and including the homeowners themselves was riding the gray train, nobody was pushing for tighter regulation and more oversight.

    The only reason my ire is personally focused on Wall St is that I think they were the only ones in the food chain who had both the perspective and sophistication to really understand the dangerous game that was being played and the rules (or more specifically, lack thereof). I believe they understood the increased likelihood and dire ramifications of the loans going bad but flagrantly disregarded them to pursue an obscene amount of short term personal gain while risking very little personal repercussions, legal or otherwise.

  5. Zentronix says:

    Absolutely agreed. It’s really been about 28 years of deregulation and winking while taking campaign donations.

    I wouldn’t hold the Buffetts and the Bloombergs out completely as shining knights. Perhaps they simply played the game smarter.

    I think we all–average schmucks unite!–need to insist on more from these fools around the economy and so much more. This election will give us some clear, if still flawed, choices.

    I just wanted to add a last thing: this past week has been very weird for me–and for, I gather, lots of homies–from an ideological standpoint. I found myself agreeing with freakin’ Thomas Friedman this morning, who even cites my man Van Jones.

    Here it is, bam.

  6. andy says:

    It’s funny that you mentioned the idealogical aspect. I’ve been struggling w/ the same thing lately as I poured through the language of some of the propositions coming to a vote. There are certain things which I may strongly support in spirit, but question the efficacy of the proposed implementations in practice. And it doesn’t help that both sides always tend to obscure the issues and mischaracterize the others’ views which makes it difficult to make truly informed decisions.

    At least the choice for president is clear. And for those American’s who don’t share that level of clarity, hopefully the prospects of a President Palin may disperse some of the clouds…

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