Let's Get the Bank Rescue Right

The financial system is the heart of our economy and it is in trouble. If we do not fix it soon, we risk a serious recession.

The Bush administration appears to understand the urgency, but the draft legislation it put forward over the past week is cause for concern. Under the administration plan, the secretary of the Treasury would have unprecedented and unfettered power to spend $700 billion in purchasing mortgage-related assets from U.S. and possibly foreign financial institutions. The definition of "financial institution" seems to be expanding to include hedge funds and other investors. While Congress clearly understands the urgency of passing legislation to avoid a financial meltdown, some hard questions need to be answered before taking this radical step.

The administration's announced willingness to take bold action should temporarily stabilize the market. If the Fed continues its aggressive lending and announces that any further failures of institutions would be appropriately handled, there will not be Armageddon. We would then have the opportunity to ponder our next move, without rushing a plan through Congress that will affect both the financial system and taxpayers for decades to come.

Any solution should observe three guiding principles: It should (1) restore the stability of the financial system quickly and at the lowest possible cost to the taxpayer; (2) punish those who are responsible for losses; and (3) address the root cause of the crisis -- the price collapse in the residential real-estate market. In doing so, the solution should respect the rule of law by spelling out the proposal in sufficient detail for the Congress and the electorate to pass judgment. To the extent possible, it should follow proven precedents.

The administration's current proposal fails to meet these principles. The Treasury's plan has three significant problems:

Bold action can be designed with lower costs to taxpayers, while accomplishing the goals Treasury Secretary Henry Paulson has laid out. Elected officials should act quickly -- but carefully.

Mr. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush. Mr. Scott is professor of international financial systems at Harvard Law School. Mr. Zingales is professor of finance at the Graduate School of Business at the University of Chicago.

"(3) address the root cause of the crisis -- the price collapse in the residential real-estate market."

That is NOT the root cause of this crisis. It's only a part of it. The problem is too much credit risk in general- everywhere. The bush bail out is NOT spending $700 billion just for purchasing mortgage-related assets from U.S. and possibly foreign financial institutions. It's buying up risky credit investment packages in general from banks. If Hubbard doesn't understand the problem, he can't offer a solution.

It will cost a lot more if we let banks collapse in this nation. But understand, this is a world wide bank problem, not just a local problem involving risky mortgages. They are only the tip of the iceburg.

That 700 billion isn’t a total loss, it’s actually a risky bail out, buying risky credit. lots of it will be recovered eventually, hopefully.

Pelosi and her gaggle of goofballs clearly don’t understand what this is all about.

We aren’t the only country shelling out hundreds of billions to stabilize the banks.

But if we don’t act soon, we may be the only country whose banks collapse.

I always get a kick out of reading doomster/insider analyses.

We, yes we, allowed the credit markets to operated in such a fashion because, we, yes we, enjoyed a 7 year boom in economic growth fueled by the credit expansion. Now, no one wants to clean up after the party.

Btw, I predict each and everyone of these bonuses, payouts and transfers will be re-captured via both criminal & civil procedures.

"I always get a kick out of reading doomster/insider analyses."

It must be true!

I read it on the internet!

Let the bad banks fail.
Let the bad companies fail.
And let the bad guys go to jail.

And the US economy WILL NOT go down the drain.

When the dust settles we will be much stronger.

That's why our system is the best ever devised.

It's modeled after Nature.

God knew what He was doing.

(1) restore the stability of the financial system quickly and at the lowest possible cost to the taxpayer;

Stating the obvious is not promoting a solution.

(2) punish those who are responsible for losses;

Like was already mentioned, those responsible for this crash are to a large extent the same people responsible for the boom that came before it. So should we praise them for 7 years of economic prosperity or punish them for the ensuing correction? Sure, there are things that could have been done better. Government oversight was severly lacking in some instances but is the answer more government control? Some lending institutions and real-estate agencies also excercised criminally bad judgement, especially in Florida and the US south-west. It's easy to point fingers today, but I dare say that very few of the people screaming today would have stood up 4 years ago, in the midst of a boom economy and said "you're doing this wrong!".

(3) address the root cause of the crisis -- the price collapse in the residential real-estate market.

The real-estate market is extremely overvalued today and there is nothing to be done to that - it HAS to crash. Spending money to maintain inflated property values is like peeing your pants in the winter, it's warm for a second but makes it far worse in the end.

The government should focus on buying up the bad debt. Not pumping money into a derivatives market out of control, like is being proposed by the administration when they now say they want to buy "mortage related assets". Mortage backed securities have a much higher risk attached to them and trying to stabilize markets by buying them up, well see my above comment on "stabilizing prices in the real-estate market". If the government buys up the actual debt, derived instruments will sort themselves out. Plus, with the debt you have a chance to recuperate some of the investments when the markets turn back up. Ultimately, this is the advantage the government has over individual banks. A bank does not have the economic muscles and stamina to ride out a downturn like this one, a government has.

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