A better financial rescue plan for the US | 16 comments (16 topical, editorial, 0 hidden)

Yes, non-voting preferred shares only might ... (none / 1)

... be expressed in a way that sounds like something other than temporary nationalization. Temporary nationalization is a non-starter ... for one thing, there would be a lot of Democratic voters who, after eight years of Bush, would be nervous to have the banking system potentially within reach of Republican control. Talk about opportunities for politicizing government institutions for partisan advantage!

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 Sep 28th, 2008 at 02:20:37 PM EST

Re: Yes, non-voting preferred shares (none / 1)

The article I linked to in my previous post quotes two people at the American Enterprise Institute (!) as writing this:

A better model for a fair solution to the incipient solvency problem is the Reconstruction Finance Corporation, or RFC, of the 1930s. This was one of the most powerful and effective of the agencies created to cope with the greatest U.S. financial crisis ever. When financial losses have been so great as to run through bank capital, when waiting and hoping have not succeeded, when uncertainty is extreme and risk premia therefore elevated, what the firms involved need is not more debt, but more equity capital."

The article describes the RFC thus:

Consider two models for government assistance. The first is the Resolution Trust Corporation ("RTC") model of the 1980s, which was used to buy up bad assets following the S&L crisis of the 1980s. The older model comes from the 1930s and the Reconstruction Finance Corporation ("RFC"), the most authoritarian federal agency that has ever existed in the United States. Directed by Jesse R. Jones, the RFC used its vast legal powers to test the solvency of banks and commercial companies and, when those institutions were proven solvent, they were allowed to re-open. Those financial institutions that were determined not to be solvent were closed by the FDIC and either sold whole or in pieces to other institutions.
Below are two very simplified numerical illustrations to highlight the failings of the current plan in Washington by way of a comparison between (1) the RTC/Paulson model and (2) the 1930s RFC model, which is conveniently illustrated by the purchase of WaMu by JPMorgan Chase (NYSE:JPM). Of note, in the WaMu resolution, equity and bond holders of the parent holding company were effectively wiped out - a significant landmark for bank investors that probably kills the private market for bank equity for the foreseeable future.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Sun Sep 28th, 2008 at 02:39:42 PM EST
[ Parent ]

Re: Temporary nationalisation (none / 1)

Temporary nationalization is a non-starter ...

Maybe the difference is in the spelling, but temporary nationalisation is exactly what Her Majesty's Treasury appears intent on doing this week with Bradford & Bingley....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Sep 28th, 2008 at 02:44:02 PM EST
[ Parent ]

Re: Temporary nationalisation (none / 0)

Also, AIG was effectively nationalized, wasn't it?

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Sun Sep 28th, 2008 at 03:12:49 PM EST
[ Parent ]

Quite so ... and what odds it would have ... (none / 1)

... made it through the Senate if it had required additional Congressional authority?

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 Sep 28th, 2008 at 03:56:08 PM EST
[ Parent ]

Re: Quite so ... and what odds it would have ... (none / 0)

If the Democrats had the interests of the country at heart and not those of the wealthy, they would have give the Republicans the choice between a Swedish/RFC type plan and no plan. Instead of coming up with their own plan, they work with a Republican bill, as usual.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Sun Sep 28th, 2008 at 04:25:43 PM EST
[ Parent ]

You write as if the Democrats are a homogenous ... (4.00 / 2)

... group. At least 40% of the House Democrats do primarily represent the wealthy ... its not like it could be otherwise with our campaign funding system ... and its not likely that many can completely ignore the interests of the wealthy. Its just that they represent a Whig variety of wealthy rather than a Dry Tory variety of wealthy.

Add to that the fact that the corporate wing gets legislation and the veneer of expertise handed to them by their corporate backers, and House progressives are mostly forced to come up with things on their own, and the outside advice they do get includes things as politically dead on arrival as temporary nationalization of banks, and its not wonder that the progressive wing of the House Democrats do not have a horse in the race.

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 Sep 28th, 2008 at 04:37:04 PM EST
[ Parent ]

Hopefully that means that the UK is not as far ... (none / 0)

... gone into insanity as the US ...

... but by all appearances the Bush administration was perfectly happy with nationalizing businesses to bail them out ... the opposition would be in the Senate, and somehow I do not imagine the House of Lords presenting such a hurdle for a UK government to get over.

The problem is certainly not that the policy is guaranteed to fail if enacted ... while the devil is in the details, its one of the main lines of approach for a government addressing a solvency crisis.

If an academic wants to make the point, "this is a solution that can work, and look how its being ignored", that's a fine lesson on the limits of the political discourse in American today ... but that's different from making a policy proposal that you hope to see adopted.

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 Sep 28th, 2008 at 04:18:57 PM EST
[ Parent ]

A better financial rescue plan for the US | 16 comments (16 topical, 0 editorial, 0 hidden)

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