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Below is the body of a letter I am sending via fax to my representatives, current, past and other, on the situation in the US.  I fear that the euphoria over the current "solution" by Paulson of injecting $250 billion into existing banks will shortly evaporate.  I don't know how long "shortly" might be.
On October 7  John Greenwood reported in The Financial Post, (Canada,) that  grain shipments were backing up at ports in the US due to buyers being unable to obtain letters of credit acceptable to sellers due to fear of institution risk,  i. e.,  fear of the lending institution going out of business before the letter is cashed.  Bill Gary, president of Commodity Information Systems in Oklahoma City cited this problem.  Such a problem can quickly bring all international sales of bulk goods to a halt and clog railroads and waterways with car and barge loads of goods.  This sets the stage for the collapse of agriculture in the U.S and for famine abroad.  Add this to the lack of availability of affordable commercial paper for industry, student loans, new mortgages, consumer credit, etc. and the whole society can seize.

The Federal Reserve can try to step into the breach, but it is not equipped to perform due diligence on all of these additional transactions and doing so would put it into an inherent conflict with its mission of  supervising banks, as it cannot properly supervise its own new banking activities without conflicts of interest and mission.  The latest plan is to try to shore up existing banks by injecting new capital.  This is almost certain to fail.  Were the food supply contaminated with deadly poisons only the Bush FDA might propose a remedy which consisted of adding a small amount of known good food to that supply.  Foreign buyers don't know which institutions can be trusted and which cannot.  With potential derivative liabilities leveraged at 30 to 1 overlaying 40% declines in real estate values backing mortgages, who can blame them?

If even a fraction of the $700 Billion being proposed for a Wall Street bail out were used to provide equity capital for new, untainted banks, we could "thaw" the financial system.  These banks should be required to operate under 1970s style banking regulations.  As banks typically hold a 3% capital reserve, $269 Billion would back over $8.96 trillion of new loans.   That should get the economy functioning again.  Use the money to establish 538 banks, one for each electoral vote, each with $16.66 billion loan capability, each located in the area represented by the vote.  There should be plenty of sadder but wiser bankers available to staff these institutions.  These new banks would be  free of the  taint of contamination from previous bad practices.  They could in time be acquired by private interests on the same terms as formerly used to determine the price for private financial institutions.  Or not.

Exporters could get letters of credit, businesses and local governments could get operating capital, consumers could finance purchases,  people could get home loans.   Let Schumpeter's "creative destruction of capitalism" go to work on Wall Street.  The economy would no longer be held hostage to Wall Street.  This will be opposed by the financial services industry.  They want the money, even if there is not enough to solve the problem.  It will be opposed by the Bush Administration.  It contradicts their ideology.  It would be like a hostage taker releasing their hostages before securing their demands.  But time is up for ideology and special interests.  The time is long past for us to start acting to protect the real economy and let high finance take care of its own problems.  We should be trying to get money back from these crooks, not be giving them more.  Make certain at least some of this money is used in a way that can actually solve the problem.

Comments or criticisms?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Oct 14th, 2008 at 10:57:54 AM EST

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