View Full Version : The wrong kind of bail-out?

09-25-2008, 09:40 AM
[Note: this is a blog (opinion) and is from the UK financial press. Whether or not you agree, at least it's a thought piece.]

Financial Times

An excellent column by Sebastian Mallaby (http://www.washingtonpost.com/wp-dyn/content/article/2008/09/20/AR2008092001059.html?hpid=opinionsbox1) looks at the unfolding Fed-Treasury plan and finds it wanting:

"The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.

The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTCs job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system."
Im a little reluctant to second-guess the proposal put together by Bernanke and Paulson because I dont know everything the Fed knows about the fragility of the credit markets and the urgency of the case. But I agree (http://blogs.ft.com/crookblog/2008/09/a-new-rtc-not-like-the-old-rtc/) that the RTC analogy is wrong, and the column is surely right about the problems the Fed-Treasury plan faces. The article goes on to mention separate alternative proposals by Charles Calomiris and Raghuram Rajan. Both stress the need to recapitalise the banks. Calomiris would do it through government purchases of equity, Rajan through mandatory rights issues and a prohibition of bank dividend payments..........


09-25-2008, 09:51 AM
I agree with your analogy and I have to wonder, How many homes does the government plan to bulldoze?:)

09-25-2008, 09:56 AM
What do you think? I just emailed below to Sen. Shelby.

Thank you, Senator Shelby for your firm stand on integrity, equity, courage and eloquently using the preciseness of English to inspire millions as Churchill did. I am likewise pleasingly shocked by the large number of your fellow Republicans rallying around equity, justice and the common man.

Regarding executive salary bail outs, there remains a lot of silliness. These greedy incompetents deserve almost nothing for helping push America and the world to a financial precipice. It is essential we make an example of their recklessness. For their parting salary pay them $1 above the maximum allowed by Congress and IRS to qualify as being impoverished. This would be a stunning rebuke of shame, disgust and warning for those who worship greed and jeopardize America.