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LQD: Finally! Some Leadership from the Left!

by ATinNM Tue Sep 30th, 2008 at 02:40:43 PM EST

Bernie Sanders, the independent Socialist Senator from Vermont, has published a letter he sent to Treasury Secretary Paulson outlining his plan for dealing with the financial crises.


In full it reads:

Dear Secretary Paulson:

As a representative of the Bush Administration, you have proposed a financial bailout program of $700 billion - over $2,000 for every man, woman, and child in the country. We are appalled that your proposal puts the cost of this bailout on average Americans; that it contains no provisions reversing failed deregulatory policies; that it allows executives at these failed institutions to continue to make exorbitant salaries and bonuses, and that your proposal contains no help for average Americans who themselves are facing severe economic hardships.

While the Administration has quickly rallied to help Wall Street, it has ignored the needs of the declining middle class. Since President Bush has been in office the wealthiest people in this country have made out like bandits and have not had it so good since the 1920s. The top one-tenth of one percent now earn more income than the bottom 50 percent of Americans and the top one percent own more wealth than the bottom 90 percent. Incredibly, the richest 400 people in our country saw their wealth increase by $670 billion during the Bush presidency.

Having mismanaged the economy for 8 years while continually insisting that, "The fundamentals of our economy are strong," the Bush Administration, six weeks before an election, wants the middle class of this country to bail out Wall Street to the tune of one trillion dollars. Meanwhile the wealthiest people, those who have benefited most from Bush's policies and are in the best position to pay, are being asked for no sacrifice at all. This is absurd.

Any plan to clean up the mess on Wall Street must:

   1. Ensure that middle income and working families are not the ones who are paying for this bailout by

     ° Imposing a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue over five years;

     ° Ensuring that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them; and

     ° Requiring that taxpayers receive equity stakes in the bailed-out companies so that the taxpayers' assumption of risk is rewarded when companies' stock goes up.

Taken together these three provisions will substantially reduce the likelihood that this bailout will end up on the backs of average American taxpayers.

   2. Include a major economic recovery package which puts Americans to work at decent wages. Among many other areas, we can create millions of jobs rebuilding our crumbling infrastructure and moving our country from fossil fuels to energy efficiency and sustainable energy. Further, we must protect our must vulnerable families from the very difficult times they are experiencing.

  3. Repeal the disastrous de-regulatory legislation that facilitated this crisis.

  4. End the danger posed by companies that are "too big to fail," that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist. We need to determine which companies fall in this category and then break them up.

In closing, we believe it is appropriate to act quickly to address any systemic danger to our economy. But that does not mean that we need to give a blank check to the financial sector.

Sincerely,

Senator Bernie Sanders

Senator Sanders is requesting US citizens sign their names to the petition.  You can do that here.

Note we have a real opening here to actually affect how this thing will play out.  Admittedly the chances of our so doing are slim, better than none, tho' -- eh?

Below are the main points in Senator Sander's plan.  Please put any comments you wish to make in that particular thread.  A 'Meta' and 'Klatsch' 'Miscellanea' section will be found at the end to be used by anyone as they deem appropriate.

Be aware any comments you make may be used without direct attribution although your name, should you decide to 'Sign-On,' will appear on the Authors page.

Display:
As a representative of the Bush Administration, you have proposed a financial bailout program of $700 billion - over $2,000 for every man, woman, and child in the country. We are appalled that your proposal puts the cost of this bailout on average Americans; that it contains no provisions reversing failed deregulatory policies; that it allows executives at these failed institutions to continue to make exorbitant salaries and bonuses, and that your proposal contains no help for average Americans who themselves are facing severe economic hardships.



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:42:08 PM EST
While the Administration has quickly rallied to help Wall Street, it has ignored the needs of the declining middle class. Since President Bush has been in office the wealthiest people in this country have made out like bandits and have not had it so good since the 1920s. The top one-tenth of one percent now earn more income than the bottom 50 percent of Americans and the top one percent own more wealth than the bottom 90 percent. Incredibly, the richest 400 people in our country saw their wealth increase by $670 billion during the Bush presidency.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:42:51 PM EST
Having mismanaged the economy for 8 years while continually insisting that, "The fundamentals of our economy are strong," the Bush Administration, six weeks before an election, wants the middle class of this country to bail out Wall Street to the tune of one trillion dollars. Meanwhile the wealthiest people, those who have benefited most from Bush's policies and are in the best position to pay, are being asked for no sacrifice at all. This is absurd.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:43:38 PM EST
I would like to suggest any 'cap' on  executive salaries be linked to the lowest wage earner in the company as a multiple of that person's earnings.  

For example, if the lowest wage earner is making $10 an hour the top wage earner in the company is max'ed at $200 an hour - 20 times - giving a yearly income spread of $20,000 to $400,000.  

For figuring income direct monetary payments ('salary,') as well as stock options, stock held directly, stock held in trust, interest/payments received from bonds and other financial instruments, net increase (but not net loss unless realized) in derivatives, swaps, & etc. are considered "income" for this purpose.

The goal of this is to link the income of Upper Management directly to the majority of workers in the firm.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 30th, 2008 at 03:38:01 PM EST
[ Parent ]
Won't that just lead to even more subcontracting of the lower-paying jobs?
by gk (gk (gk quattro due due sette @gmail.com)) on Tue Sep 30th, 2008 at 03:40:50 PM EST
[ Parent ]
Your question relates to the whole "off-shoring" problem.

I don't have a good answer.

Off the top of my head the solution is found in the relation of the 'off-shored' - domestic or foreign - workforce to the company.  If the worker receives a certain percentage of their income from a firm then they are to be counted as a 'direct' employee.  Just to be a jerk I would set that percentage very low, such as 33% or even 25%.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Oct 1st, 2008 at 01:57:12 AM EST
[ Parent ]
... is index to median wages, because wage range capping company by company will just lead to more outsourcing.

One cap is that any manager on more than 10 times the median wage cannot have a contract of more than two years. If combined with real requirements for majority independent boards, it would make it much easier to ditch terrible executive management teams ...

... where I saw the discussion on why golden parachutes are so massive, the example given was of course Ms. Fiorina, who was taking Hewlett-Packard down the crapper. $50m to get rid of her was clearly a well-justified investment, but if the board had had the power to just give her the sack by not signing a new contract, that would have been much better.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Oct 1st, 2008 at 12:47:59 PM EST
[ Parent ]
... compensation about 10 times the median wage must be in out of the money stock options maturing in five or more years.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Oct 1st, 2008 at 12:49:09 PM EST
[ Parent ]
Ensure that middle income and working families are not the ones who are paying for this bailout by


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:44:51 PM EST
Ensure that middle income and working families are not the ones who are paying for this bailout by:

Imposing a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue over five years;


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:48:26 PM EST
Way too soft.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Sep 30th, 2008 at 02:53:23 PM EST
[ Parent ]
What do you think would be appropriate and effective?

Raise the surtax?  Lower the Income Level at which the surtax kicks in?  Flat tax on all income? (Note: that would hurt the poor and Middle Class badly.)  Progressive tax?  Forget the time limitation?  National Sales Tax in some form?  (Again, that would most affect, unless 'glossed' in some manner, mostly the poor and Middle Class.)

Something else?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 30th, 2008 at 03:16:06 PM EST
[ Parent ]
Raise the surtax, make it permanent, and add some even higher rates for higher incomes. I mean, I'd hope the Socialist candidate could aim for more progressive taxation than Reagan's US...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Sep 30th, 2008 at 03:27:19 PM EST
[ Parent ]
Flat tax. On wealth.

Oh, and confiscatory inheritance taxes.

And ban billionaires. Well, ban €-billionaires. $-billionaires may soon be thirteen to the dozen.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 30th, 2008 at 03:31:27 PM EST
[ Parent ]
By "wealth" you mean the monetarized value of all property held by an individual?

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 03:40:20 PM EST
[ Parent ]
That's certainly one way of doing it.

However, if we're talking about a flat tax, my own preference would be to tax the means of production: They don't move around too much, they're hard to hide on the Cayman Islands, and no amount of cooking the books can obfuscate them.

Plus, it gives a simple and effective means to stop tax cheats: If nobody pays property tax on a factory, that must mean that nobody wants to claim ownership, and the factory thus belongs to the government. That way, the state gets its taxes and the fatcats get to figure out among themselves who'll be paying them.

The value of each asset should be priced as the higher of the market value and the government auditors' assessment in order to dampen asset price bubbles.

I don't really care about Wall Street or their funny-money or their fancy paper. When the last chip hits the table, he who controls the productive assets wins.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Sep 30th, 2008 at 03:51:44 PM EST
[ Parent ]
Wasn't sure what you meant.  Got it.

Property taxes, here in the States, are levied by local and state authorities, for the most part.  A Federal property tax on land, farms, factories, & etc held by US corporations outside the US is a really interesting idea.  If dedicated to the same purposes as the local property taxes: education and infrastructure, it could get broad support.  

At least I see a way of presenting a good case to the Public.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 30th, 2008 at 04:06:04 PM EST
[ Parent ]
... by one of the Central American nations in its land reform ... use the land value declared for tax purposes as the compensation that must be paid if land is nationalized.

Of course, the result was the CIA acting as an enforcer for United Fruit in overthrowing the government. But in abstract, its a check on understating taxable property value that bears considering.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 12th, 2008 at 11:47:15 PM EST
[ Parent ]
Sure, in the interim, while the government gets its own auditor corps up and running.

The threat of nationalisation at compensation equivalent to the value declared for tax purposes is scary if and only if a) you systematically under-value your land in order to defraud the taxpayers AND b) there is a real need for land reform.

I am not sure that there is a real need for land reform in much of The West(TM). So we'd need an auditor corps to assess the property values.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Oct 13th, 2008 at 01:36:02 AM EST
[ Parent ]
... scary was the political economy of it. There likely is a political economy of acquiring undervalued property and selling it at auction on the open market that would make it sufficiently scary ... though I don't think I'll be thinking that through.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Oct 13th, 2008 at 06:50:18 AM EST
[ Parent ]
What would be appropriate ? A pound of flesh ? A quart of blood ? selling their children into slavery ?

The difficulty is that, cutlurally, people may be outraged by their greed, but they don't actually think it's wrong. To the winnner, the spoils.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Tue Sep 30th, 2008 at 03:40:14 PM EST
[ Parent ]
In order to make this fly, the Bill has to be seen as "fair."  A real problem is the success the Right has had in making any Tax = "Unfair."  Even in this crises the GOP has been out trying to whip-up broad support for tax cuts.

And Senator Obama is out spouting a "Tax cut for the poor and Middle Class."

To help solve the problem the Tax part of this needs to be revenue enhancing.  Meaning some group is going to have to pay more.  The obvious group are those who benefited by the Looting - in Frank Schnittger's apt wording.  One way is by increasing the tax responsibility of individuals.  Another is by increasing (i.e., making the bastards fork over) the tax responsibility of Corporations.  

Even a flat tax on Corporations would raise a lot of money AND meet the "Fairness" qualification.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Sep 30th, 2008 at 03:55:45 PM EST
[ Parent ]
Taxing corporations? Jobs! Investment! Communities! Doomed!

Oh, wait - we don't have any of those anyway. Carry on.

One other useful item on the list is repealing the law which gives corporations some of the same rights as individuals, with none of the democratic responsibilities.

Another useful item would be creating a completely new index of economic welfare - and I don't mean GDP, I mean the Dow, which has become the de facto measure of economic health.

Let's say Corporation A decides to reimport jobs from China. Workers in the US are much more expensive than Chinese workers, so its profits will take an instant hit.

If enough corporations do this the Dow will be hammered, because 'analysts' will 'punish' corporations which are 'uncompetitive.'

With an alternative index based on populist economics - most usefully median disposable income - you can say neener neener neener to the Dow. As long as investment is still happening - which could be a useful metric for a companion index - it can crash and no one needs to care.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 30th, 2008 at 05:45:54 PM EST
[ Parent ]
That's not a law, that was a Supreme Court decision, and thus higher than any law.  One would need a constitutional amendment for that, I think.
by Zwackus on Wed Oct 1st, 2008 at 01:51:40 AM EST
[ Parent ]
I'm not familiar with the relevant case law, but perhaps corporations could be nerfed in ways that don't contradict the decision in question. By, for instance, imposing the demand that only half the board can be composed of representatives of the stockholders, while the other half is to be composed of members elected by the employees by secret ballot.

But oh, the hue and cry that would go up :-P

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Oct 1st, 2008 at 10:37:21 AM EST
[ Parent ]
Or a Constitutional Amendment.

Or, you could simply restrict the granting of corporate personhood in meaningful ways, or that corporate persons be tasked with activities other than maximum shareholder return.

by Zwackus on Thu Oct 2nd, 2008 at 04:17:32 AM EST
[ Parent ]
... it was introduced in a summary of a Supreme Court decision by the chief clerk, and then that summary of the decision referred to when the decision was used as a precedent.

But overturning it would require a quite different court than the one we have now.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 12th, 2008 at 11:49:39 PM EST
[ Parent ]

the rack will help get the offshore bank account passwords.

but no waterboarding, we don't do that...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Sep 30th, 2008 at 03:48:59 PM EST
[ Parent ]
Ensure that middle income and working families are not the ones who are paying for this bailout by:

Ensuring that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:49:42 PM EST
Ensure that middle income and working families are not the ones who are paying for this bailout by:

Requiring that taxpayers receive equity stakes in the bailed-out companies so that the taxpayers' assumption of risk is rewarded when companies' stock goes up.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:50:54 PM EST
Taken together these three provisions will substantially reduce the likelihood that this bailout will end up on the backs of average American taxpayers.



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:52:37 PM EST
Include a major economic recovery package which puts Americans to work at decent wages. Among many other areas, we can create millions of jobs rebuilding our crumbling infrastructure and moving our country from fossil fuels to energy efficiency and sustainable energy. Further, we must protect our must vulnerable families from the very difficult times they are experiencing.



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:53:52 PM EST
Repeal the disastrous de-regulatory legislation that facilitated this crisis.



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:54:36 PM EST
End the danger posed by companies that are "too big to fail," that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist. We need to determine which companies fall in this category and then break them up.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:55:29 PM EST
In closing, we believe it is appropriate to act quickly to address any systemic danger to our economy. But that does not mean that we need to give a blank check to the financial sector.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:56:20 PM EST
Here we discuss the discussion



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 02:59:20 PM EST
Drop me an email?
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 30th, 2008 at 03:57:56 PM EST
[ Parent ]
email dropped.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 04:09:05 PM EST
[ Parent ]
The chief bogey man held out by those advocating the $700 billion bail out is that not doing so would cause credit to freeze up, bringing the economy to a halt.  But there is no guarantee that spending $700 billion on bad assets will unfreeze credit. And what if much of the money ends up paying to unwind derivative bets leveraged at 30 to 1? Instead of investing $700 billion in assets we know are bad to worthless, why not invest a fraction of that amount in eliminating any possibility of a credit freeze?

Banks typically have a 3% equity, or reserve capital, requirement.  By creating 538 new banks, one for each electoral vote and a minimum of three new banks in each state, with $500 million reserve capital each, a total new loan capacity of $8.96 trillion is created for a total public investment of $269 billion.  This is a very significant fraction of current total loan capacity and this much new loan capacity may well be too much.  The program could authorize a total of $500 million per bank but start with $100 million per bank.  This first step alone would likely solve credit availability problems,T as solvent existing banks would have to re-enter the market to hold market share.

The government provided equity capital should be provided by senior stock held by a federal agency.  The banks could be required to adhere to conservative, stogy banking practices, required to devote a certain portions of their loan portfolios to commercial paper, to real estate finance, to student loans and to renewable energy investments.  The real economy would no longer be held hostage by Wall Street and we could let the current situation play out and intervene and invest where possible to prevent avoidable damage with what is left of the requested $700 billion rescue fund.

This will be bitterly opposed by the banking industry.  They will cry that this is unfair competition by government sponsored entities when they are burdened by bad assets. Supporters of this plan can respond that the obligation for government action is to act for the good of the taxpayers and the overall economy, not for the good of Wall Street and bad actors in the finance community.  And in two or four years time these banks can be made available for sale on the same terms as private banks are sold, given the size and quality of their assets.

Profits from the sale of these banks could be used to pay for shortfalls in Social Security and Medicare, VA  benefits and other worthwhile public needs.  A process that saves and clearly protects the real economy, lets Wall Street stew in its own toxic juices and turns a profit for the public in the bargain should be wildly popular if it is ever clearly presented to the voters.

This plan would break the frame of "We must bail out Wall Street to save the economy." Something like this will likely have to be done in the end.  Why flush $700 billion before trying a sure thing?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 1st, 2008 at 02:16:30 AM EST
[ Parent ]
Bernie's been on this for awhile and he is definitely pointing in the right direction.

Obviously I think they should go farther (why stop at a 10% surcharge?) but anything to move to ball forward is a right step in the right direction.

Given the relative lack of spine and or ideological principle of the Democrats he's caucusing with, it's hard to see how we get from point A to point B but, it is true, having a Senator who is in our corner and gets these things in the public record is an enormously good thing, if but for posterity. For when we do have to get things right, having an official "I told you so" in the public record is quite powerful and you and I both know it's not coming from Fritz Schumer whatever his strengths in other things...

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Sep 30th, 2008 at 03:52:52 PM EST
1. Ensure that middle income and working families are not the ones who are paying for this bailout by [...]
     ° Requiring that taxpayers receive equity stakes in the bailed-out companies so that the taxpayers' assumption of risk is rewarded when companies' stock goes up.

Please explain this statement and how the Treasure will distribute securities certificates purchased to taxpayers so that they may collect dividends or obtain capital gains.

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 30th, 2008 at 04:17:34 PM EST
My personal 'take' was he wants something along the lines of the earlier Swedish bail-out of their financial system.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 04:22:29 PM EST
[ Parent ]
Pardon me. That is not an answer. It is another question:  How did the Swedish government distribute securities certificates to taxpayers so they could collect dividends or obtain by capital gains?

It is my very broad understanding, from exchanges here by Sven, that the Swedish government forced certain banks into Ch. 11, of which the conservator was a government operated, special purpose entity (SPE or GSE). Details of the disposition of these banks' --the number of which-- obligations and subsequent impairment to the SEK --not a reserve currency-- haven't been discussed here.

In any case, the nearest facsimile of conservancy that the Emergency Economic Stabilization Act of 2008 comes to is discrimination among securities (warrants), where provisions requiring purchase of non-voting preferred stocks or conversion of non-voting common stocks to preferred stocks (or bonds if existing shareholders reject additional issue of preferreds) in the event the financial institution is delisted; it's stocks are not marketable. Such an event, insolvency, may then place the Treasury in the unenviable role, being perhaps the majority stockholder by volume, of "owner" or conservator or, practicably speaking, receivor of the book and shareholders' equity, if any.

That situation exemplifies the result of advancing poorly managed firms $700B that does not in itself exist to simulate income that does not in itself exist.  Meanwhile, Citibank purchased Wachovia Bank for $43B ($1.9B in cash).

With that kind of leverage, the US Treasury could purchase a lot of viable banks and brokerages for $700B. Then, because the Treasury brain-trust is so, so financially smart, invent some structured ABS to sell US households that doesn't (much) dilute everyone's "equity" and positions "our" banks for more regular, stringent management review. Unless of course Obama renews Paulson's contract as promised.

Where's that plan?

Diversity is the key to economic and political evolution.

by Cat on Tue Sep 30th, 2008 at 05:18:53 PM EST
[ Parent ]
Here is the speech delivered to the Federal Reserve Symposium at Jackson Hole, Wyoming in 1997 by       Riksbankschef Urban Bäckström What Lessons Can be Learned from Recent Financial Crises - The Swedish Experience. (pdf)  He was the Director General of the Swedish Bank Support Authority -- the body created to manage the crises.

The IMF published a pamphlet: "The Nordic Banking Crises: Pitfalls in Financial Liberalization?" By Burkhard Drees, Ceyla Pazarbaşioğlu, 1998 ISBN 1557757003, 9781557757005.  If you go to Google Books, move to the next page (Table of Contents), you can click on "The Swedish Experience" and that will take you directly to the relevant pages (29 - 31).

The solution applied in Sweden consisted of three main parts (from the IMF pamphlet):

  1.  The Swedish government guaranteed "all bank commitments be met on a timely basis and that no depositors, creditors, or other parties would suffer any loses; only share capital and perpetual debentures were excluded from the guarantee.  (In one case (Gota Bank) the parent company Gota AB was declared insolvent and the Swedish government took over the parent company at no cost: the shares were declared to be worthless.)  This guarantee was temporary.

  2.  The long-term financial costs should be minimized and that paid-out support should be recovered to the fullest extent possible.  

  3.  The Sveriges Riksbank was to provide liquidity to banks but injection of state money, as needed, into the banking system was an On-Budget item.  

The total committment was projected to be 5.9% of GNP (Skr 85 billion) the direct cost, to the Budget, was 4.2% of the GNP (Skr 61 billion.)  This last has decreased from loan-loss recovery, equity sales, and other asset-management practices.  Total outlay of the crises:  4% GNP in cash with 1.9% GNP recovered.  

It is to be noted the Swedish plan was directed at the Banking system NOT the "Financial Sector" -- which was the thrust of Bush administration, as I analyze it.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Oct 1st, 2008 at 01:43:35 AM EST
[ Parent ]
Yes, I see the government lost taxpayer money, though it was all for the good.

I read the speech and ordered the publication (GOOG cookies are prohibited on my machine). It took me a while to stop laughing when I read this.

[W]e started to study historical and international records of financial crises...

Irving Fisher (1, 2) and an anthology edited by Martin Tradeable-Gas-Rights Feldstein, The Risk of Economic Crisis, including Benjamin Friedman, Paul Putz Krugman, Lawrence Summers [who needs no introduction], and E. Gerald Corrigan: The Counter-intuitive Who's Who of Fiscal Policy Gurus.

Happily, I persevered as did Mr Backstrom and colleagues. For the Swedish authorities had only seven banks, dominating 90% of the financial sector, to "restructure." I noted with interest the Riksbank's (FRB equivalent?) material demonstration of full faith in these banks' directors, hand in hand with daily auditors of the Bank Support Authority.

Collateral was not required for the loans to banks, neither intraday nor overnight. The banking system was free to obtain unlimited liquidity by drawing on its accounts with the central bank.

Arguably the conformation of monetary policy from fixed to float up to the Maastricht Treaty catalyzed the greatest challenge of re-coupling financial and economic incentives domestically. So his analysis implies.

Rescuing the banking sector was necessary to avoid a collapse of the real economy. There is no evidence that a credit crunch developed, though anecdotal information did suggest that creditors became more restrictive.

But what I found most interesting in Mr Backstrom's remarks is the consensus on organizing principles of an RFC-type strategy, according to him one or the other.

  1. "[D]eferring the reporting of [bank] losses for as long as is legally possible and using the bank's current income for a gradual writedown of the loss-making assets." This is more or less how Paulson Geithner LLC is directing Congress to approve the Bailout Bill. However the compound "difficulties," as Mr Backstrom predicted it,"leading to much greater problems when they ultimately materialize," are further glossed by obscure valuation methods and tax easements in the measure and conjoined with HR 3997 and 1442, sliming its way to the House floor. (At this point I digressed to research further USC and US case law re: impaired obligation of contracts and federal requisitions)

  2. "[A]n open account of all expected losses and writedowns ... This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. It [also] entails a risk of creating an exaggerated perception of the magnitude of the problems."

The US Congress is simply incapable of adopting #2. And so goes the prospects of any kind of New Deal or "Aftercare" or "Semi-Swedish Solution"... old_equity vs new_equity. LOL.  

Anyway, thank you for that information.

Diversity is the key to economic and political evolution.

by Cat on Thu Oct 2nd, 2008 at 02:45:35 PM EST
[ Parent ]
That is, if the system recovers sufficiently, there is more revenue generated from companies as dividend payments, or from markets as capital gains on sale of equity, than was devoted to the bail-out.

But, damn, wouldn't it be a fine thing if the system yielded a permanent social dividend after refunding the cost of the bail-out to the Treasury.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 12th, 2008 at 11:53:30 PM EST
[ Parent ]
Okay, used my superpowers to make it vanish and thanks for your understanding. :-D
by Fran on Tue Sep 30th, 2008 at 04:25:56 PM EST
Shout outs.  To and fro'ing.  Whatever.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Sep 30th, 2008 at 04:29:35 PM EST
and so, more interesting, did Feingold, Dorgan, Wyden, Tester, Johnson, Nelson, Cantwell, Stabenow, and Landrieu. That is the correct response to the "Emergency Economic Stabilization" measure itself, because it is defective. It is the correct response to the cowardly tactic of creating an omnibus bill in order to hide the defects of that measure among merits of other bills which the House passed but which in themselves do nothing to remedied the defects of the "amendment." That is leadership for the moment.

Measure Number: H.R. 1424  (Paul Wellstone Mental Health and Addiction Equity Act of 2007 , ROLL CALL )
Measure Title:     A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers; [H.R. 3997, "Heroes Earnings Assistance and Relief Tax Act of 2007," ROLL CALL] to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.

Both Mssrs Obama and McCain voted Aye, reporting unequivocally their leadership abilitities and business acumen.

Diversity is the key to economic and political evolution.

by Cat on Thu Oct 2nd, 2008 at 06:36:53 AM EST


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