[R-G] [BillTottenWeblog] A Bailout We Don't Need

[Bill Totten]

by James K Galbraith

Washington Post (September 25 2008)


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
Corporation 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.

In Texas, recovery from the 1980s oil bust took seven years and the pull
of strong national economic growth. The present slump is national, and
it can't be cured that way. But it could be resolved in three years,
rather than ten, by a new Home Owners Loan Corporation, which would
rewrite mortgages, manage rental conversions and decide when vacant,
degraded properties should be demolished. Set it up like a draft board
in each community, under federal guidelines, and get to work.

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.

What to do? Reenact Richard Nixon's great idea: federal revenue sharing.
States and localities should get the funds to plug their revenue gaps
and maintain real public spending, per capita, for the next three to
five years. Also, enact the National Infrastructure Bank, making bond
revenue available in a revolving fund for capital improvements. There is
work to do. There are people to do it. Bring them together. What could
be easier or more sensible?

Here's another problem: the wealth loss to near-retirees and the elderly
from a declining stock market as things shake out. How about taking care
of this, with rough justice, through a supplement to Social Security? If
you need a revenue source, impose a turnover tax on stocks.

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 1990s about technology, what should the 2010s and 2020s 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 thirty years and paid less than four
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.

_____

James K Galbraith is the author of The Predator State: How Conservatives
Abandoned the Free Market and Why Liberals Should Too (2008).

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html


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