Friday, September 26, 2008

Shift Bailout Risk to the Banks - A Great New Idea!

Washington Post business columnist Steven Pearlstein has a fantastic idea to let the very US banks causing the financial meltdown -- not US taxpayers -- to shoulder most of the risk of the urgently needed bailout.

His insight: Instead of paying cash to those banks in exchange for their bad investments -- the government would take them off the books of those banks by ISSUING PREFERRED SHARES IN A NEW GOVERNMENT-OWNED RESCUE CORPORATION.

The government would capitalize that corporation with $100 billion in cash (taxpayer funds). It would buy and hold troubled securities until the market restabilized. It would then sell the securities those banks holding them would reap the gains. The government could go ahead and redeem (buy back) the shares at any time. Banks could count the shares as part of the capital they need to hold. Credit crunch solved.

I quote :
The beauty of this arrangement is that, rather than protecting taaxpayers by having the government take an ownership stake in hundreds privately owned banks, it would be the banks that would own a stake of the government's rescue vehicle. The government would suffer the first $100 billion in losses from buying and selling the asset-backed securities, but any further losses would be borne by the other shareholders.
And lest this become fodder for high stakes debate, Pearlstein reminds us of what is at stake:

...all it would take is one more hit to trigger the modern-day equivalent of a nationwide bank run. Financial institutions would fail, part of your savings would be wiped out, jobs would be lost, and a lot of economic activity would grind to a halt. Such a debacle would cost us a lot more than $700 billion.

Who is going to step up and save us from that scenario -- George Bush? Harry Reid? Nancy Pelosi? John McCain? BarackObama? Barney Frank (grrrr....more on him later)? The Democratic-controlled House and Senate? The dissident Republicans?

Pearlstein's plan is pure genius and it gets around the tough politcal obstaclesd that have the nation tied in knots. Let's spread the word -- this plan is the best idea I have seen to put the risk of calamity far behind us.

Please (a) comment, (b) forward this blog post to your elected representatives, (c) forward it to your friends, and (d) tweet it if you are on Twitter, and (e) use your other social networking platforms as well. I'm on it right now - please join me!



Elizabeth (Beth) LaMie said...

What a staright-forward, common-sense approach! No wonder the "powers that be" have not considered it.

I will definitely pass this on to my contacts.

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