Experts and The Alternatives to $700 Billion Bailout

Gary has prompted me to make this post. I read this article by Anthony Faiola and David Cho of The Washington Post and it feeds into exactly what we both were saying. Since I couldn't say it any better, I'm attaching this article to my blog:

From MSNBC.com
Experts offer alternatives to bailout
Leading economists argue that other solutions could address financial crisis
By Anthony Faiola and David Cho
The Washington Post
updated 10:38 p.m. CT, Tues., Sept. 23, 2008

To hear Henry M. Paulson Jr. and Ben S. Bernanke tell it, there is only one plan to save the economy -- use $700 billion in taxpayer money to take the worst of Wall Street's assets off its books.
But leading economists and financial thinkers argue that there are a host of alternatives that would reduce taxpayers' liabilities and perhaps more effectively address the urgent crisis in financial markets. Although these experts concede that the clock is ticking, they say different approaches have been dismissed too quickly.
While the government's plan is built around buying troubled assets, other options offer sharply different visions.
One approach seeks to reduce taxpayers' liability by offering collateral-backed loans to troubled banks, leaving them to work out their own solutions. Another idea is to have the government set up a profit-driven investment fund with the aim of infusing the financial system with cash without taking on bad debt. Still others suggest radically different tactics of directly helping homeowners by reducing mortgage principal or bolstering banks by suspending capital gains taxes.
The administration has said it is willing to negotiate key parts of its plan -- including a possible concession allowing the government to take equity stakes in financial firms in exchange for bailing them out -- but senior officials stand by the fundamental approach they have adopted to solve the crisis.
"They presented this as a comprehensive, decisive solution, but it's clearly not comprehensive and probably not decisive," said Simon Johnson, a former chief economist at the International Monetary Fund and a professor at Massachusetts Institute of Technology.
The cost of a mistake could be huge. It could result in a catastrophic collapse of the U.S. financial system that could ripple across the world or in a staggering clean-up bill for taxpayers. At the core of the debate is whether Paulson, the former chief executive of Goldman Sachs now charged with rescuing Wall Street as Treasury secretary, and Bernanke, the Federal Reserve chairman and one of the leading academics on financial crises, are serving up the best possible recipe for purging the U.S. financial system of billions of dollars worth of distressed mortgage-related debt.
Under the administration's rescue plan, the Treasury secretary would have broad discretion to buy up to $700 billion worth of troubled mortgage-backed assets and other securities that Wall Street firms have been struggling to sell. Administration officials hope that once those assets are cleansed, money will flow freely through the financial system once again and that the government can hold onto the securities until they recover some of their value.
In testimony on Capitol Hill yesterday, Bernanke and Paulson explained that they formulated their plan after considering past crises, from the U.S. savings-and-loan bailouts of the 1980s to the bursting of Japan's economic bubble a few years later. But they ultimately decided that the response to the current crisis needed to be a fast and massive fix.
"The situation we have now is unique and new," Bernanke said. He later continued, "The firms we're dealing with now are not necessarily failing, but they are contracting. They are de-leveraging. They're pulling back. And they will be unwilling to make credit available as long as these market conditions are in the condition they are."
Many of the alternatives fall under four basic approaches:
Government as lenderCritics 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.
Government as hedge fundSome market analysts and fund managers worry that the Paulson plan would allow Wall Street to dump the worst kind of mortgage securities on the federal government. One solution could be the establishment of a fund that limits its purchases to profitable mortgage securities and other assets.
The creation of a $700 billion investment fund could help reinvigorate the business of trading mortgage securities, greasing the wheels of the credit markets by bringing in a new, cash-rich investor: the federal government. While this solution runs the risk of not cleaning up enough of the bad debt on firms' books, taxpayers could be more confident of getting their money back because the government would be selective about which securities it bought.
Mortgage breaksLiberal thinkers say the government could intervene in the financial system by addressing the ailing mortgages at the heart of the crisis. Under this approach, the government could reduce the amount of principal that struggling homeowners owe.
"It's about foreclosures, stupid," said John Taylor, chief executive of the liberal National Community Reinvestment Coalition.
One idea is for the government to take control of some mortgage-backed securities -- most likely by buying them from financial firms -- and then work to restructure the underlying loans into something homeowners could afford. The value of the securities, both those bought by the government and those in private hands, could improve as foreclosures and late payments drop. If so, financial firms holding mortgage-backed securities could see a recovery in their balance sheets.
To make it fair for homeowners who keep up with their payments, borrowers who receive federal help would be required to give the government some of their gains if they eventually sell their homes for a profit.
But advocates of the idea acknowledge that it may take time to address the problems of millions of struggling homeowners. In the meantime, critics of this approach say the financial system could fall into chaos.
Tax breaks for Wall StreetConservative analysts take a different tack, though their criticism of the Paulson plan has been no less sharp. They say that because the proposal forgives Wall Street for its past sins, it creates an incentive for investors to behave irresponsibly in the future.
Some of these thinkers complain that the government's rescue punishes taxpayers too severely for Wall Street's mistakes. They propose a cheaper alternative that calls for the repeal of the capital gains tax for two years, which would provide Wall Street a stimulus to reinvigorate the financial system.
Accounting rules that require banks to estimate the market value of their troubled mortgage securities would also be suspended for five years, giving financial firms the ability to value these assets at prices more reflective of the market before the panic gripped Wall Street.
Rep. Jeb Hensarling (R-Tex.) said this plan, which he announced on Capitol Hill yesterday, was still being finalized. Hensarling said the precise cost of the capital gains tax repeal, for instance, was still being determined.
"We agreed that inaction is not an option, but that doesn't mean that we've concluded that the Paulson plan is the only option," said Hensarling. "There are alternatives to consider, and we think we have a worthy one."
All of these alternatives try to get at the root of the turmoil facing the financial markets and the economy but in different ways. According to Lawrence Summers, former Treasury secretary, the government might have to try multiple approaches.
"If you have hypertension, you're way overweight and you're in the process of having a heart attack, what's your most fundamental problem? It's really not that useful to distinguish between them," Summers said at a Brookings Institute forum. "They're all components of the situation, and you're not going to get to a very satisfactory place unless you address all of them. That's how I think of our financial reality right now."
© 2008 The Washington Post Company
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Hurricane Ike, and the Stupidity of Some

The sun is shining today in Tulsa. Yesterday was quite different. The remnants of Ike rolled through Texas, and up through eastern Oklahoma, Arkansas and Missouri as a tropical depression. From 3 p.m. until sometime late last night, it rained torrentially, a driving rain that swirled from varying directions. Ike puffed his stuff too, with gusts exceeding 40 mph, letting those of us in the Sooner State know he wasn't quite finished.

In the Galveston and Houston areas, rescue crews are busily trying to save those from the devastation, stranded in the wake of the storm. What really irks me is that so many people, an estimated 140,000 Texans, based on the best data and forecasting from weather experts, still ignored mandates to leave, and wouldn't get out of harm's way. Now it is going to cost everyone of us millions of dollars to come to their rescue, even though they had ample time and the free transportation to leave.

I just don't get it. You can give me any number of excuses why they did not leave, but based on the dire warning that those staying would "face certain death" over 140,000 risked life and limb to stay. One man, whose family was only 2 blocks from the coastline, huddled in the attic of their home. Their 5-year-old son fell through the ceiling and onto the garage floor. Luckily, the boy wasn't seriously injured. The dad's comment: "We just didn't think it was going to come up like this," said the boy's father, Lee King. "I'm from New Orleans, I know better. I just didn't think it was going to happen."

Forcing one's family to "ride out" a possible, if not probable, death for no reason other than pure stubborness or stupidity is beyond my comprehension. But when an adult or parent purposely ignores the warnings, and puts their child in harm's way, they ought to be held accountable for their actions (or lack thereof). There is a law on the books in every state titled wreckless endangerment which comes to mind. That is the least charge these so-called "parents" or "guardians" should have to face.

Those children had no choice in the matter, and had to stay with their parents. They had to do whatever their parents decided. But the parents should have to pay for the consequence of ignoring the mandated evacuation, and should have to defend their reason for staying. We can only hope that the parents don't pay the ultimate price of a lost child.

Where has common sense gone?

If You're Feeling Old and Not Needed....

Today is the 7th anniversary of the horrific attacks on America we now call 9/11. I was watching a program on the History Channel regarding that infamous day when I heard a story that made me stop and write this newest blog.

On that fateful day, all of the fire hydrants near the World Trade Center towers were put out of commission by the collapse of the buildings. There was no water to suppress the fires that raged at Ground Zero. But this did not stop the heroic New York City firefighters.

Pressed into service was a fireboat called the MV John J. Harvey, built in 1931, a 268-ton, 130-foot long ship, which had been retired in 1994 and sold for scrap. Ready to answer the call, the Harvey (now renamed by the NYFD as Marine 2) was moored close to the WTC, and pumped up to 18,000 gallons of water per minute for 80 hours straight to thirsty pumper and ladder trucks, until hydrants could be made operational once again.

I would venture to say that nobody believes the Harvey was too old to meet the task at hand, nor not needed on that day in September, 2001.

May we all be like the Harvey, and "pump" everything we can into our everyday lives to make this a better world in which to live.

Nailin' Palin on the Head

Dear Family and Friends. Although I don't agree with Gloria Steinem on all issues, I do on this one. This is so eloquently worded, I decided to dedicate this weeks' "Dose of Don" to her thoughts. Please enjoy reading this point of view.

San Francisco Opinion

Palin: wrong woman, wrong message

Sarah Palin shares nothing but

a chromosome with Hillary Clinton.

She is Phyllis Schlafly, only younger.

By Gloria Steinem

September 4, 2008

Here's the good news: Women have become so politically powerful that even the anti-feminist right wing -- the folks with a headlock on the Republican Party -- are trying to appease the gender gap with a first-ever female vice president. We owe this to women -- and to many men too -- who have picketed, gone on hunger strikes or confronted violence at the polls so women can vote. We owe it to Shirley Chisholm, who first took the 'white-male-only' sign off the White House, and to Hillary Rodham Clinton, who hung in there through ridicule and misogyny to win 18 million votes.

But here is even better news: It won't work. This isn't the first time a boss has picked an unqualified woman just because she agrees with him and opposes everything most other women want and need. Feminism has never been about getting a job for one woman. It's about making life more fair for women everywhere. It's not about a piece of the existing pie; there are too many of us for that. It's about baking a new pie.

Selecting Sarah Palin, who was touted all summer by Rush Limbaugh, is no way to attract most women, including die-hard Clinton supporters. Palin shares nothing but a chromosome with Clinton. Her down-home, divisive and deceptive speech did nothing to cosmeticize a Republican convention that has more than twice as many male delegates as female, a presidential candidate who is owned and operated by the right wing and a platform that opposes pretty much everything Clinton's candidacy stood for -- and that Barack Obama's still does. To vote in protest for McCain/Palin would be like saying, 'Somebody stole my shoes, so I'll amputate my legs.'

This is not to beat up on Palin. I defend her right to be wrong, even on issues that matter most to me. I regret that people say she can't do the job because she has children in need of care, especially if they wouldn't say the same about a father. I get no pleasure from imagining her in the spotlight on national and foreign policy issues about which she has zero background, with one month to learn to compete with Sen. Joe Biden's 37 years' experience.

Palin has been honest about what she doesn't know. When asked last month about the vice presidency, she said, 'I still can't answer that question until someone answers for me: What is it exactly that the VP does every day?' When asked about Iraq, she said, 'I haven't really focused much on the war in Iraq.'

She was elected governor largely because the incumbent was unpopular, and she's won over Alaskans mostly by using unprecedented oil wealth to give a $1,200 rebate to every resident. Now she is being praised by McCain's campaign as a tax cutter, despite the fact that Alaska has no state income or sales tax. Perhaps McCain has opposed affirmative action for so long that he doesn't know it's about inviting more people to meet standards, not lowering them. Or perhaps McCain is following the Bush administration habit, as in the Justice Department, of putting a job candidate's views on 'God, guns and gays' ahead of competence. The difference is that McCain is filling a job one 72-year-old heartbeat away from the presidency.

So let's be clear: The culprit is John McCain. He may have chosen Palin out of change-envy, or a belief that women can't tell the difference between form and content, but the main motive was to please right-wing ideologues; the same ones who nixed anyone who is now or ever has been a supporter of reproductive freedom. If that were not the case, McCain could have chosen a woman who knows what a vice president does and who has thought about Iraq; someone like Texas Sen. Kay Bailey Hutchison or Sen. Olympia Snowe of Maine. McCain could have taken a baby step away from right-wing patriarchs who determine his actions, right down to opposing the Violence Against Women Act.

Palin's value to those patriarchs is clear: She opposes just about every issue that women support by a majority or plurality. She believes that creationism should be taught in public schools but disbelieves global warming; she opposes gun control but supports government control of women's wombs; she opposes stem cell research but approves 'abstinence-only' programs, which increase unwanted births, sexually transmitted diseases and abortions; she tried to use taxpayers' millions for a state program to shoot wolves from the air but didn't spend enough money to fix a state school system with the lowest high-school graduation rate in the nation; she runs with a candidate who opposes the Fair Pay Act but supports $500 million in subsidies for a natural gas pipeline across Alaska; she supports drilling in the Arctic National Wildlife Reserve, though even McCain has opted for the lesser evil of offshore drilling. She is Phyllis Schlafly, only younger.

I don't doubt her sincerity. As a lifetime member of the National Rifle Assn., she doesn't just support killing animals from helicopters, she does it herself. She doesn't just talk about increasing the use of fossil fuels but puts a coal-burning power plant in her own small town. She doesn't just echo McCain's pledge to criminalize abortion by overturning Roe vs. Wade, she says that if one of her daughters were impregnated by rape or incest, she should bear the child. She not only opposes reproductive freedom as a human right but implies that it dictates abortion, without saying that it also protects the right to have a child.

So far, the major new McCain supporter that Palin has attracted is James Dobson of Focus on the Family. Of course, for Dobson, 'women are merely waiting for their husbands to assume leadership,' so he may be voting for Palin's husband.

Being a hope-a-holic, however, I can see two long-term bipartisan gains from this contest.

Republicans may learn they can't appeal to right-wing patriarchs and most women at the same time. A loss in November could cause the centrist majority of Republicans to take back their party, which was the first to support the Equal Rights Amendment and should be the last to want to invite government into the wombs of women.

And American women, who suffer more because of having two full-time jobs than from any other single injustice, finally have support on a national stage from male leaders who know that women can't be equal outside the home until men are equal in it. Barack Obama and Joe Biden are campaigning on their belief that men should be, can be and want to be at home for their children. This could be huge.

Gloria Steinem is an author, feminist organizer and co-founder of the Women's Media Center. She supported Hillary Clinton and is now supporting Barack Obama.