Wednesday, October 01, 2008

A New Rescue Bill Consensus Forming In the House

Here is a report about two bills forming in the House that together would be two-thirds of the solution I proposed a couple of days ago: combining purchasing bank securities with aid to homeowners.

There's just one problem with this. It can't completely REPLACE the Paulson proposal to buy up toxic securities.

Some toxic securities have to be taken out of the system for credit markets to start to free up. Without this component, we might shorten the coming depression by a few years, but we'll still see a sharp contraction till the other components can trickle through the system.

So we need those two bills PLUS a component of the Paulson bill.

If we want to have the best shot of avoiding a painful recession, we NEED some of those securities bought out as Paulson suggests so that credit markets can quickly recover. If those markets stay frozen any longer (another two weeks?), our painful recession will be unavoidable.

The problem with Paulson's approach: it was immediate action, but pure political poison. The politicians have been right that poison needs some vitamins for the immune system, plus something sweat, to make it go down. But just don't take too long brewing this cocktail, or the patient will expire.

UPDATE: Here's another great idea in the Financial Times. Under this scenario, there's a convincing case we don't need to purchase the toxic assets at all and can rely on buying warrants and shoring up homeowners. Maybe this is the way to go after all?

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