What a Responsible Plan Looks Like

by: David Sirota

Mon Sep 29, 2008 at 17:20


So what should Congress do to pass a bill addressing the credit problem? Seems to me this ain't rocket science. Short of nationalizing our banks like Sweden successfully did, how about what's in the extended entry.
David Sirota :: What a Responsible Plan Looks Like
- Give Paulson $150 billion, with the transparency and oversight of the bailout bill that just got voted down. Better yet, instead of vesting one person with that much power, set up a Reinvestment Finance Corporation like we did during the S&L scandal.

- Include the Blue Dogs' plan for a financial industry tax, or Bernie Sanders millionaire surtax.

- Pass $50 billion in job-creating infrastructure spending, and $50 billion in aid to struggling homeowners.

- Repeal the repeal of the Glass-Steagall act.

- Include provisions allowing judges to renegotiate the terms of subprime loans, as well as the executive compensation limits and the equity stake language - only make the language much tighter so as to require these things, rather than merely urging them.

I'm sure I'm missing a few things - but how about that basic outline as a starting point?  A plan that looks like that could be cobbled together in a matter of hours on the Hill, as the pieces are already there. Worked correctly, you could get most of the Democratic caucus to support this, and pressure enough endangered Republicans to support it too.

As I said...this ain't rocket science.  

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What a Responsible Plan Looks Like | 31 comments
my brother is an investment adviser (4.00 / 4)
and not nearly as liberal a Democrat as I am.

He thinks Paulson is the most dangerous person in America.

He says what Sweden did worked fine and is the logical course.

And I assure you, he is no fire-breathing populist.

Join the Iowa progressive community at Bleeding Heartland.

my friend who managed a hedge fund at Bear (one of the profitable ones) agrees (4.00 / 3)
agrees completely with what you just wrote. he is a distressed debt guy - so does a ton is rescuing insolvent companies and refinancing them. he thought the Dodd modified Paulson plan was weird and that pricing would be impossible. That Treasury is criminals doing everything for the benefit of big players like JPM and Goldman, he was sickened by AIG. and that a nationalization sort of plan is far more common to recapitalize the business/bank.  

Michael Bloomberg, prince of corporate welfare
[ Parent ]
penalties for bad loans (4.00 / 2)
Financial institutions that wrote loans where the borrower failed to make the first year's payments reasonably on-time should be penalized.

The bailout bill should give stock to the federal government connected to the value of the bad loans written by the institution.

For example, if XYZ Bank wrote $1.5 million of loans that defaulted in the first year then the federal government gets $1.5 million of ownership of XYZ Bank.

This attaches some real world adverse consequences to financial institutions who behaved irresponsibly.

On this, Delong agrees (0.00 / 0)
At least on following the Sweden model.

And really, the AIG model, if it comes to that.  Which we implemented, what, oh, 1 month ago?

Im down with nationalization (4.00 / 1)
but if winning the middle would be easier by giving Paulson money in exchange for warrants preferred voting shares at some mandatory ratio, then I would go for that.

my problem with today's bill was Paulsons could basically blow off the warrants requirement, and the warrants we for shlock - common non-voting shares, talk about getting last in line.

Michael Bloomberg, prince of corporate welfare

[ Parent ]
Right (0.00 / 0)
Given how we handled AIG, it is quite possible that doing nothing will result in exactly what most liberals want.

But, it will all happen a bit late.

---

This reminds me of the Iraq war.  I was completely against it, but once it started it was interesting to see just what our military could do.  It wasn't too hard to just watch history unfold like a I was watching a movie.

I kind of feel that way now.  I don't think this nay vote was wise, but it certainly is more interesting than the alternative.  I'm interested to see how this unfolds.

[ Parent ]
May you live in interesting times? (0.00 / 0)
I...suppose?
[ Parent ]
thats the problem (4.00 / 1)
letting it unfold like AIG naturally will be a disaster. it won't give confidence to the market which I believe is needed to prevent a needless sell off. im in the we have a crisis brewing camp and we do need to act.

Michael Bloomberg, prince of corporate welfare
[ Parent ]
$50B in aid to homeowners... (0.00 / 0)
How would this work, exactly?  I'm a homeowner, but haven't missed a payment.  Would I get any aid, or just people that have defaulted on their loans?

Not that I'm against aid to homeowners, but just as it's probably not fair to bailout the banks that got us into the mess, it's also probably not fair to completely bailout the homeowners who contributed.  Otherwise, why shouldn't I just default on my own loan and take advantage of some government money?  There needs to be disincentives for taking the government money just as their should be disincentives for businesses to do the same.

Otherwise, these are all fine, but the public would probably still be largely against it (they probably won't know the difference between that plan and the original plan).  Democrats passing it without bipartisan approval risk throwing away the presidency as well as pickups if the public is as overwhelming against the current plan as you think.

I do wonder, though, whether the bill could've gotten the votes it needed from the progressive caucus had it included some of these things without frightening away more Republican votes... It's quite possible.

i think this would alienate conservative voters (0.00 / 0)
and give GOP and Bush justification to strike it down. there can't be any hand outs in this for anyone.

Michael Bloomberg, prince of corporate welfare
[ Parent ]
Purchase, Lease (4.00 / 2)
Personally, I think the government should provide the option of purchasing homes that would otherwise default on their loans and then lease them back to the previous homeowner.  Perhaps even a rent-to-own plan could work.

This would prevent rewarding bad behavior while keeping people in their homes.  It also might add value to the toxic loans, since it would be known there is a buyer for all defaults.

[ Parent ]
This is a better idea... n/t (0.00 / 0)

[ Parent ]
Price (0.00 / 0)
The key would be how the purchase price is set.  The purchase price would have to be determined automatically in a way the minimum value of the loan could be determined by the loan owner.  That actually might free up liquidity as well.

Now, I've heard the actually value of defaulting homes is so huge that $700 billion would look puny.  If that is the case, clearly this can't work.  Though, perhaps, the price could be set fairly low, lower than any would normally sell.

I'd be curious to see if anyone who actually knew economics and the numbers could work it out.

[ Parent ]
refinancing might be better (4.00 / 2)
enable refinancing at market rate - so no price chaos, and no capital layout - then slap an option on all future sales that profits go back to the bank less shipping and handling for the govt, and you wack the home owner by zeroing the equity. they'll never make money on their house, but they can afford to live there.

this was part of a plan that went around from an economist at U of Chicago. its not perfect but its pretty good. he was also pushing a form of nationalization to recapitalize the banks. very simple and pretty darn good with minimal tax payer exposure.

except banks hate not getting free money.

Michael Bloomberg, prince of corporate welfare

[ Parent ]
$1.1 Trillion (0.00 / 0)
Now, I've heard the actually value of defaulting homes is so huge that $700 billion would look puny.

Perhaps not.

The U.S. mortgage market is estimated at $12 trillion[15] with approximately 9.2% of loans either delinquent or in foreclosure through August 2008.

That adds up to $1.1 trillion, close to the $700 billion we are already talking about.

Ok, this is officially my new plan.  All I need is 1.1 trillion: where do I sign up?

[ Parent ]
at (0.00 / 0)
the atm

Michael Bloomberg, prince of corporate welfare
[ Parent ]
Actually, you would need much less annuallly (0.00 / 0)
because the lenders would postpone the foreclosures if only they get all their outstanding premiums. And this sum is much lower than the total value of the mortgage. However, this still leaves the ethical question open: Why pay the bills for those in foreclosure, with a considerable number of crooks and spendthrifts among them, and leave all those in the rain who struggle hard and do without even small luxuries like steaks and icecream to pay their dues every single month? Bailing out homeowners sure is a popular plan, but when you think about the details, it increasingly looks like a monster.
[ Parent ]
Lose house (0.00 / 0)
Well, since the homeowner loses the house it is only a partial bailout.

Of course, I'm just some random guy making up stuff from the comfort of his own home; I don't really know what I'm talking about.  But it seems setting a minimum, calculatable value to all homes loans would help liquidity.  Letting people lose home ownership while still being allowed to live in them via rent seems like a reasonable compromise.

[ Parent ]
Huh? (0.00 / 0)
"Well, since the homeowner loses the house it is only a partial bailout."
Why should he lose the house if the taxpayer pays his bills??? The lender can't evict him if there's no outstanding debt.

"Letting people lose home ownership while still being allowed to live in them via rent seems like a reasonable compromise."
This is something that should be considered. No reward in it, because no ownership anymore, but families won't have to worry about homelessness, and no problem with boarded up foreclosures brining the comps of the neighborhood down. Plus, the rent would help to offset the costs for the taxpayer. It all depends on the details, of course, but this looks like a step in the right direction.

[ Parent ]
Thanks David (0.00 / 0)
I can wrap my head around that.

If ever there was a time to revive Glass-Steagall, this would be it, but I haven't heard any politicians bring this up. At least, we should be talking about it, right?

"I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that."
-Lawrence Summers

Thanks David (4.00 / 1)
thanks for kicking of a nice simple discussion to rally around - thats for listening to my bitching.

Michael Bloomberg, prince of corporate welfare
corx (0.00 / 0)
thaNKs for listening...

Michael Bloomberg, prince of corporate welfare
[ Parent ]
How about a Cross-the-Board WriteDown? (0.00 / 0)
Since its the mortgages that are the heart of the mess, why not write down the interest rate and principle for every mortgage created in the past 5 years?  Additionally, the U.S. should start purchasing houses from banks and create a homestead-type law to help those who lost their homes.  

If we fix the underlying cause - that MBS's have no value on the open market, we can stabilize the credit market.  

Contituent Calls: 100% to 0% against (0.00 / 0)
a policy expert on Bloomberg Radio reported that some congress members we're getting call ratios of 100:0 against the bill. the environment was completely toxic to passing the bill today.

Michael Bloomberg, prince of corporate welfare
Not surprising (0.00 / 0)
Even people like me who thought the bill should be passed weren't exactly enthusiastic about it.
[ Parent ]
Crisis? What crisis? (0.00 / 0)
The swedish plan? What for? There's nothing to see here. Move on. And don't mention the elephant in the room! You will get banned for such disobedience.

Remember: There IS NO crisis. Matt said so. It's the new law.

Hmm, on second thought... (0.00 / 0)
this comment was a bit overly dramatic. You can still say "crisis" here. See?
Crisis, crisis!
No stones flying, nothing to fear!
(now, who threw that rotten tomato???)
[ Parent ]
Wealth tax (0.00 / 0)
Now is also a time to pay for all this: a one-time wealth tax on all net wealth above $10 million: 10% of $10-20 million net worth, 20% of $20 -50 million net worth, and 40% of all net wealth above $50 million. This will affect wealthy families in a big way, but given how much money they've made in the past 8 years, it will probably not make them any poorer than they were in 2001.
We need lending directed at working capital (4.00 / 1)
One of the nastiest part of a credit crunch is when good companies simply cannot get short-term capital (generally 1-3 months; but maybe 6 months for farms) to temporarily ramp up operations or deal with temporary fluctuations. One funding failure can result in the collapse of the business and the loss of a great deal of intangible value (vetted and trained employees, established business relationships, coordinated production processes, etc.) Companies with really high credit ratings are still OK, but there's a bad shortfall for mid-value companies.

We need a backup funding system in case banks have trouble raising funds for a while. The best way would be a targeted Fed window - a large amount of funding loaned out at appropriate 1-3-6 month durations, accepting working capital loans as collateral.

The current Fed approach is to dump out liquidity at overnight durations. For decades, the investment banking system has been able to convert this to 1-3 month durations without trouble, so that approach has worked. Right now, though, investment banking is pretty much dead and they can't convert the durations. So we actually have a large excess of overnight and 1 week loans (commercial paper volumes at those durations is at all-time highs) and the shortfall at 1-3 months. The Fed primarily needs to adapt to the current situation and match its offered durations to those needed by the real economy.

Don't forget ... (0.00 / 0)
... I'd include $25 billion for a New Deal-esque jobs program.
In other words (2.00 / 2)
In other words, David, you have no idea what a responsible plan looks like.

Let's hit the highlights:

Pass $50 billion in job-creating infrastructure spending, and $50 billion in aid to struggling homeowners.

This has nothing to do with credit.  It's nice and I'd probably argue for it anyway, but it won't solve the financial problems.

Repeal the repeal of the Glass-Steagall act.

Who will it apply to?  Didn't you hear that the last of the investment banks decided to switch their status?  Besides that there's the argument that the repeal of glass-steagall actually helped in all this since it meant that consumer banks could buy investment banks.  So, what you've got here is a nice lefty slogan with zero meaning behind it.

Include provisions allowing judges to renegotiate the terms of subprime loans

Renegotiate?  Based on what?  With whom?  Will this be a contract between the judge and the lender?  how will it be enforceable.

Give me a fucking break.

What a Responsible Plan Looks Like | 31 comments
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