Tuesday, September 30, 2008

More Time for A Better Bailout

Clearly, the markets are saying they can hang in there for a few more days IF they can get SOMETHING passed.

Clearly, Congress has to pass something. But with people on the right and left both agreeing that the Paulson plan is fundamentally flawed, perhaps this is time to come back with something better structured.

Many argue that buying up toxic derivatives and getting them off the books is the ONLY way to restore liquidity. I tend to agree that this component is necessary. But I think the markets would survive if this wasn't the focus.

Perhaps the focus should combine the consensus between liberal Paul Krugman and conservative Ben Stein on CNN last night: providing more help to homeowners and buying bank stocks of failing banks (as done in the case of AIG).

Perhaps, rather than buy the toxic derivatives over value and taking warrents if the government isn't made whole (which seems backwards), government should just be given a range of tools to deal on a case by case basis: 1/3 of the money for investing, 1/3 of money for buying out the derivatives (with the other compromise measures in place) - adding a stipulation that banks who sell their derivatives can't expect a future cash infusion rescue - and 1/3 of the money to aid homeowners.

Increasing the money for investment would help the government participate more on the updside and reassure taxpayers they would be made whole eventually.

Keeping some part of a derivatives purchase plan would give the government leverage to step in and resotre financial confidence in the short term where needed.

Increasing the homeowner aid would increase the political popularity of the proposal. And it would put the money where it would ultimately do the most good: at the root of the problem.

3 comments:

EMM said...

This is the most thoughtful analysis -- and helpful proposal -- I've read anywhere.

I linked here from the site I write for: thesamerowdycrowd.com

How'd you get so smart? What's your background?

Thanks.

Palympset said...

Thanks!

My background: one year of Freshman macroeconomics at Wash U., in St. Louis (home of Thursday's debate, BTW), which I largely pulled a Palin on (pretty much skipped class, just read the textbook, and showed up for the final). The rest: a combination of a physics degree and a creative writing background, so I think I'm pretty good at digesting abstract things like numbers and trends and putting them in human terms.

On this issue specifically, I've just listened to what the various economists (i.e., the people who actually know something about this) have been saying, and judging the political reality, and this seems like something that makes the most sense, to me.

EMM said...

Wow. You can wrap your brain around both physics and creative writing? Isn't that a violation of our fundamental understanding of how the right and left parts of our brains work?

At any rate, I appreciated that your proposal offered a serious and specific approach to our current economic woes. The Senate votes tonight. Some measure will be hammered out, no doubt. But this is, as they say, just the beginning.

I'll keep an eye on your site. It's a good one.

And thanks, yourself.