(email exchange)


“There is a way to get money flowing through the banking system and financial markets almost instantaneously. The Federal Deposit Insurance Corp. has the authority to declare an emergency in the financial markets if the secretary of the treasury requests it. If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails.”

This presumably can include Fed deposits at member banks, which opens the door for Fed unsecured lending which is currently illegal.

Now the trick is to get the word to the right people at Treasury!

Along with, of course, a payroll tax holiday to sustain aggregate demand.


>   On Thu, Oct 9, 2008 at 12:32 PM, Jeff wrote:

We need to get it right

by William M. Isaac

Political leaders told us last week that if the Wall Street bailout bill did not pass, the stock market would drop by 1,000 points and millions of people would lose their homes, jobs and credit cards.

Congress passed the bill, yet the markets have gotten worse.

I believe the problem is that the bailout package does not deal with any of the four fundamental issues that must be addressed immediately: fear, bank capital, fiscal stimulus and help for homeowners.

Fear: The financial markets are frozen throughout the world. Banks will not lend to other banks and, to the extent they do, the cost is exorbitant. There is a lot of liquidity but it is being hoarded.

Which banks will fail and how will their creditors be treated? Will the government protect just the insured depositors or will it protect the uninsured depositors, bond holders, and other general creditors? The government has handled these claims in different ways in the failures to date, so there is considerable anxiety in the markets.

There is a way to get money flowing through the banking system and financial markets almost instantaneously. The Federal Deposit Insurance Corp. has the authority to declare an emergency in the financial markets if the secretary of the treasury requests it. If an emergency is declared, the FDIC could announce that until the crisis abates, all depositors and other general creditors will be protected if an FDIC-insured bank fails.
What would this cost taxpayers? In my view, nothing — indeed, it should save taxpayers a lot. It will get the financial markets working, help put the economy back on track and reduce the bank failure rate.

We already have an implicit guarantee in place for the largest banks, which control the bulk of our banking assets. Making the guarantee official during this crisis and extending it to the rest of the banks is essential and reasonable.

As I write this article, Ireland has guaranteed its banking system and Denmark and several other European countries appear headed in that direction. If enough follow, the U.S. will have no choice but to act.

Bank capital: The Securities and Exchange Commission adopted fair value accounting in the 1990s. This rule required financial institutions to mark their securities to market. I have argued against fair value accounting for more than two decades because I know that we could not have contained the severe banking problems of the 1980s if we had to deal with fair value accounting rules.

A bad idea became highly destructive when the SEC decided to continue fair value accounting after the market for mortgage securities evaporated last year. In the absence of a market, the SEC forced banks to mark these assets to an arbitrary index.

Mortgage securities were marked to a fraction of their true economic value, which destroyed $500 billion of capital in our financial system. Since banks lend about $10 for each dollar of capital, the SEC’s rule diminished bank lending capacity by $5 trillion. Is it any wonder we have a severe credit contraction?

Even now, the SEC continues to fiddle while the financial system and the economy burn. The SEC needs to suspend fair value accounting — act now, study it later. This will begin the process of restoring bank capital so banks can start lending again. Instead of the Treasury and Federal Reserve taking over our lending markets, we need to help our private banks do the job.

Another readily available tool to restore bank capital is one that the FDIC used in the banking crisis of the 1980s to give capital-short, but otherwise viable, banks injections of capital to help them get through difficult economic times. The program was a big help in the FDIC’s resolution of the $100 billion market insolvency in the savings bank industry at a total cost of less than $2 billion. A precursor of the 1980s program was the Reconstruction Finance Corporation, created to provide capital to banks during Great Depression.

The FDIC should resurrect this program immediately. It will limit the failures of community banks and put them back into the lending business more quickly.

Fiscal stimulus and help for homeowners: The bailout bill will not solve our banking crisis because it is not attacking the right problems. Instead, we should direct a good portion of the bailout money to providing permanent stimulus to the economy and to helping families who are in danger of losing their homes.

I believe Congress should get off the campaign trail and get back to Washington to get the bill right this time. The world is looking to us for leadership.

16 Responses

  1. Warren, I can’t see how a payroll tax holiday would ever fly politically (though I agree with it).

    Think of past campaigns where SS was discussed and politicians talked of how we’re “spending” the SS surplus instead of “saving” it.

  2. We need to break the back of the terrists, that means all warren’s plans to stimulate must be fought, because we need mellowing, not stimulation, so that oil can drop, and the terrists can be hurt, bush told me so hisself. Even warrens buddy mr. masters said we need to break the back of speculators! slowdown, sell your car, ride a bicycle, and be mellow.


    There was a time when I was in a hurry as you are
    I was like you
    There was a day when I just had to tell my point of view
    I was like you
    Now I don’t mean to make you frown
    No, I just want you to slow down

    Have you never been mellow?
    Have you never tried to find a comfort from inside you?
    Have you never been happy just to hear your song?
    Have you never let someone else be strong?

    Running around as you do with your head up in the clouds
    I was like you
    Never had time to lay back, kick your shoes off, close your eyes
    I was like you
    Now you’re not hard to understand
    You need someone to take your hand

  3. Turn off that bloomberg terminal Warren, park the mosler super car, take it easy bro, and listen at some Olivia Newton John, slowing down aint the end of the world, reading news snippets about iceland banking problems does not get me and you cancer cures and genetic breathrough’s, stop sponsoring MBA students in highschool, but them a guitar instead 😉

  4. Great catch.

    Looks like there might be some good action this weekend. I hope they start buying banks soon (as in this weekend). I think this is one of the few ways that are inline with a real solution and also political palatable right now.

  5. 1. agreed. sad but true. i’m thinking maybe they are scared enough to do the ‘right’ thing, but maybe not.

    2. yes, i’d increase demand and pass the 30 mph speed limit for private transportation at the same time.

    3. they will think they are doing a lot, but probably more rearranging of financial assets and beating up of shareholders all without adding to demand, as eurozone banking continues under pressure.

  6. LOL that is from moodys – yah let’s listen at those crooks!

    Mike I suggest we round up all the finance types, you, cutcheon, Jorge RL, Mosler, Masters, Paulson, Bernanke and put you all on a “infrastructure” chain gang and make all you worthless dopes rebuild the bridges and roads and crop the fields and give me free food off the sweat of your backs. All you idiots got us into this mess, and the boyz from moody’s down to you I think should be the slaves to dig us out, I think the PUBLIC GOOD will best be served by vaporizing 99% of the finance type jobs you all hold now and add you to the REAL ECONOMY where real work is done, so since I know you personally aren’t a lazy bum just wanting to pontificate about solutions offered by lying crooks like moody’s, when can I expect you to pick up a shovel and a hammer and a scythe and go do some real work? What a hypocrisy – pathetic. I am gonna do nothing, I am gonna collect my free food stamps, and live in my foreclosed house and laugh at all you suckers thinking monetary tools is gonna get this donkey to plow again. You guys plow, I am tired.

  7. Ted,

    I agree. If you are going to have a troll, at least have one that is apparently good-natured, funny, creative, and i think intelligent.

  8. Ted the real danger is that the angry unproductive citizens start supporting fascist type policies, or through inaction allow fascist type power to gain strength. Personally I am seeing this all around me, many people just too tired or exhausted or disenchanted to care. Voter turnouts were under 20% here recently – that is terrible – but really most feel why bother, they can’t make a difference.

    One of my neighbors got locked up last week because he refused the homeowners association demands that he resod his yard – his brown grass made the other homes look bad. To me this is insanity, I can now be locked up in prison because my grass died. (we have had a drought by the way and 200 dollar water bills are beyond my budget) I do not want that type of society to continue.

    Warren and his intellectual cohorts will be rounded up by the new minions of the ever growing power of the police state and be shot first as happened many times in history – the intellectuals and elites are an easy target to appease the angry JOE 6 pack and his idle hands.

    These econ boyz may think because they got the money they can keep control over the new political regimes. Thyssen was a wealthy banker in germany that funded hitler when he was a nobody, but it didn’t save him, the SS put Thyssen in jail too.

  9. 11. yes, and articulate. a little heavy on the cheap shots and name calling, but i’ve seen a lot worse and am pretty careful not to get defensive.

  10. Yes Mike you do express some important points/ideas. Lets all hope the brain trust in Washington and elsewhere find a solution to this mess before our economy reachs the point of no return. Btw Warren, this is a wonderful site you have here. If no one has ever done this, let me thank you for providing the rest of us with this forum to discuss economic matters. I’am sure even Mike would agree with me.

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