26 September 2008

A Bailout We Don't Need

Here is the alternative proposed by James Galbraith in The Washington Post today:
"The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

With this solution, the systemic financial threat should go away."



Blogger Dawei_in_Beijing said...

Here's my personal proposal... in my opinion, the best way to go about this is to divvy up the money among business schools of PUBLIC universities, so they can buy up property for the government, hold for as long as necessary, and sell at a profit. The universities can then keep a fixed percentage to add to their endowment, and the rest goes to the tax payers.

26 September, 2008 10:49  

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