My Proposal for Improving Lending Between Banks
The purpose of this proposal is to offer an alternative to Congress. The current $700 billion proposal burdens taxpayers with excessive risk at the expense of abusive institutions. The simplicity of this proposal allows its efficiency to take immediate effect with little risk to taxpayers. The goal is to stabilize the banking system and to re-stabilize the global economy.
To begin with, there were three primary perpetrators in this corruption, and they all should be held accountable. First, the lack of oversight by the US government was a primary cause, and the government should be held accountable. Next, the lending institutions who abused the system should not be allowed to profit from its demise; they need to pay for their mistakes. And the mortgage buyers who speculated on higher housing prices at the expense of moderating risk are also to blame; they should not be given a pass for their mistakes either.
The motivation to this excess was driven by greed. Now, many of those same perpetrators are trying to force the hand of Congress by imposing fear into the system instead as negotiations become heated. Fear that the banking system will collapse, fear that housing prices will fall, fear that the market will crash, and fears that come election time they better have made the right decisions are weighing on the minds of our policymakers. These fears can cloud judgment just like greed did initially. Stop being afraid of what lies ahead and start being proactive.
First, the economy is going to weaken over time, based on the diminishing demand for investments. This cannot be stopped. Therefore, accept that the economy will be under pressure, expect it to contract, and accept the fact that people will indeed lose jobs along the way.
With that understood the direction of Congress should be to lessen the burden on the taxpayer, and soften the blow of a weakening economy as best as possible. This means, specifically, taking control of government debt. Excessive debt by our Government has directly caused many individuals to feel that they too can incur excessive amounts of debt without concern. Reality hits hard, and it is hitting now. Take control of the debt burdens of the country.
Direct relations to the current proposal exist in the $700 billion price tag. The US Government cannot afford to do this, not in the face of declining demand. In addition, the risks associated with these synthetic debt instruments are likely to cause that initial cost to be completely lost.
First, the declining demand and weakening economy that is indeed coming with or without this current banking crisis will influence many more defaults, and many more bank failures. Therefore, the US government will be left holding worthless synthetic debt and have no one to turn to to recoup their losses, in many instances. The loan will be dissolved, the bank will be dissolved, and the $700 billion price tag will have a high probability of being integrated directly into Government Debt in the form of losses. Arguably, this price tag may also be increased over time.
The current proposal being considered by Congress does not guarantee that banks will begin to lend to each other though. At that's because risks will still exist. Those risks need to be dissolved in order for the banking system to continue. That's what my proposal does.
The proposal below is not complicated, but it is very effective. The premise is, we need to allow banks to fail, but we need to preserve our banking system.
My Formal Proposal:
- Develop a Guarantee Trust Organization to protect banks who lend to one another. This would act as insurance between the banks. The US Government would guarantee the monies and the risk of default between the banks operating in our banking system would be completely removed from the equation. This is the primary goal of any and all proposals made thus far, but none tackle the issue directly. This is a direct influence to encourage activity within the system.
- Require banks to separate themselves into 'Good Banks' and 'Bad Banks.' The disposition would be exactly like the purchases of the good assets of Washington Mutual (WM) by JP Morgan (JPM), and Wachovia (WB) by Citigroup (C).
- The GTO would guarantee lending based on the assets of the Good Bank. This would reduce the volume of lending activity overall, but it would also allow the system to operate. A contraction in the system is required and it will happen regardless of the eventual accepted proposal. My plan would quantify that contraction.
- In the event of bank failure the GTO would absorb the assets of the 'Good Bank' to preserve the integrity of the accounts, and spin those assets off to a willing buyer in the open market. The 'Bad Bank' and the proceeds from the 'Good Bank' would be left to reconcile in bankruptcy court.
- The GTO would recoup the guaranteed funds immediately following the sale of the Good Bank in the open market. Therefore, the proceeds of the Good Bank would be the net purchase price agreement less the guaranteed funds.
This plan is simple, and simple works. The banking system will be preserved, although it will have contracted. The measure will be quantifiable, and this will please Wall Street. Lending will resume, and the integrity of the economy will be preserved. Global economies will also be a direct beneficiaries.
The taxpayer will assume very little risk. They will not have the burden of holding potentially valueless assets and the US Government will not inch closer to bankruptcy because of this fiasco.
Banks will fail, and they should be allowed to fail. The shareholders and bondholders of those banks will be impacted, and they should be. The good assets of the banks who fail will be absorbed into sound financial institutions and a more stable, reliable, and powerful banking system will prevail. This will take time, but in the end the integrity of our banking system will be much more than it is today.
More defaults and foreclosures will occur, we need to accept that. In many cases greed forced the hand of ARM loans and other creative loans which are now causing the system to fail. Those persons who engaged in these risky loans, with full knowledge of the risk, should be blamed as well. Politically, this may not sit well with some members of Congress. However, it should. If your constituents took aggressive loans based on the ability to make a quick buck and they were left holding the bag, taxpayers should not be forced to bail them out.
My plan is simple, straight forward, it works, it preserves capitalism, and it will restore our banking system, our economy, and the global economy over time.
Please contact me directly with your questions.
If this simple, logical, and effective plan is something you support, please pass it on.
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This article has 6 comments:
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gksmar
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11 Comments
Sep 29 01:01 PMBecause even certain people are to be blamed for taking aggressive mortgages which are beyond their means.
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LCACM
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38 Comments
Sep 29 01:40 PM-
Sean G.
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1 Comment
Sep 29 05:34 PMAlso, in regards to LCACM's comment about manufacturing jobs. I agree that we should spend resources on projects that will improve our country and our ability to work and live. This is what the highways and big infrastructure projects of the 1930s did for the post-World War II U.S. However, I am not certain of the true effects of an international minimum wage. I will certainly think about it more though. Good to come up with ideas.
Below is an alternate plan to the $700 billion bailout that will work.
With all the talk of the economic plan on the table to supposedly help the U.S. and world avoid an economic nightmare I agree with many to believe this plan is severely flawed. The main objective of this plan, according to its authors, is to free up lending as they are concerned that if no action is taken banks and lending firms will be severely pinched by their mortgage mess and therefore not be able to or willing to extend credit to businesses and consumers at the same level we see today. That in turn will limit the spending power of these consumers and businesses, both big and small. For consumers it will mean they cannot afford that car, house or even college tuition they were planning to borrow for unless they had stellar credit or the cash on hand to pay for it outright. For businesses it will mean they cannot afford that improvement they needed to stay competitive or the capital they needed to keep the payroll moving during slower weeks again unless they had stellar credit or the cash on hand. This scenario alone might not seem all that bad to us as we might say if they don't have great credit or the cash on hand they shouldn't buy it anyway. However, the greater implication for this scenario is further reaching. There is a vast majority of consumers and businesses that have neither excellent nor terrible credit. They pay practically all bills on time and most certainly will pay debts in full over the course of their life. They just might not have a perfect record. These are the consumers and businesses who will be squeezed out by the lessening of available credit out there and you might be one of them.
What does it mean for you, according to the authors of the current bill for a $700 billion bailout in Washington? When these consumers and businesses stop buying these items, the companies who sell them will have a drastic drop in sales and will most likely lay off employees and may default on their own loans as a result of the loss of revenue. Further, house prices will drop dramatically as a result of fewer buyers on the market who can obtain a mortgage (which may or may not be a bad thing in itself considering how inflated some markets are these days.) Those employees who were laid off may then apply for unemployment insurance, exhausting the fund, and default on their own loans and mortgages, further worsening the problem. Is this scenario possible? Yes. Is the $700 billion bill as proposed now a fix to it? I doubt it and so do most people on Capital Hill and in cities across the U.S.
The problem with the bill in Washington right now is that we are rewarding the companies who created this mess with their bad decision-making by buying the mess from them, hoping if we held onto it as taxpayers it will be easier to deal with and they can then resume their lending to the world. We are entrusting billions of our money into the hands of the very same people who proved less than capable of handling their own money. This is surely flawed judgment if we think this will result in a good outcome.
If the problem facing us is how we could protect the American credit system and keep it vibrant and stronger than ever so businesses and consumers can grow and prosper then why not a different, more direct solution? If we could afford to bail out the mismanaged lenders with $700 billion then why can't we create a $700 billion fund that could be used to directly lend to businesses and consumers that have good credit and good goals in mind. This fund would solve the problem that the authors of the $700 bailout plan are warning about. It would also better free up the ability of the next president, whether Obama or McCain, to keep on their promises of investment in new technology, new programs and a new America unlike the current $700 bailout plan which would all but cut off any new spending for years or decades to come. The plan would essentially force the companies who made continuous bad decisions when it came to lending out of business and allow the banks and companies who were intelligent with their behavior the chance to grow even more, right in line with the American ideals of capitalism at its best. The Treasury could even use the profits generated from the interest on these good loans to start to pay off the national debt, further freeing us up over time. What if the government cannot set up a loan screening and administration process quick enough to have an effect on the economy? Then I suggest we lend the money to the banks who proved reliable during this crisis as they have the means and judgment to get us back to fundamentals that work. This includes not only the larger national institutions that seem to be reliable but also the thousands of local banks and credit unions that would be able to revitalize their respective local areas with these loans. With this plan we can turn a challenge into a fantastic opportunity.
A lot of people are up and arms about the $700 billion bailout because it seems flawed in so many areas. If a crisis is upon us now is the time to solve it with a simple and logical plan, not a politically motivated plan that few believe in. If you feel this plan might work better please forward it on. If you feel you can improve it please do so.
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JasonC
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367 Comments
Sep 29 05:49 PM-
po'd in Plano
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15 Comments
Sep 29 09:33 PM-
Lawrence Kramer
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21 Comments
Sep 29 10:19 PMNuclear energy, CNG, coal, wind, solar, etc. We need to use local energy sources to run our stuff, and we need to SELL our oil to pay for our toys.
Go back to econ 101 and study comparative advantage. In this day and age, any country that can produce oil ipso facto has a comparative advantage in oil and should export oil. Until recently, our comparative advantage was in investment grade paper - something we could produce more cheaply than just about anyone else. Now, that advantage is gone. We need to export something else, and oil is it. All we need is the brains and courage in Washington. Which is why I've loaded up on SDS and TWM.