A Plan for Economic Recovery

We are facing the prospect of global deflation and depression, similar to but potentially worse than the 1930s. That said, I believe the situation could be turned around by adopting a bold and comprehensive program. Unfortunately, Treasury Secretary Geithner did not present a convincing case. I outline the basic elements of such a program in my forthcoming Book, The Crash of 2008 and What it Means. I am providing an excerpt here in the hopes that it will stimulate discussion and help generate the necessary political will for bold action.

The bursting of bubbles causes credit contraction, forced liquidation of assets, deflation, and wealth destruction that may reach catastrophic proportions. In a deflationary environment, the weight of accumulated debt can sink the banking system and push the economy into depression. That is what needs to be prevented at all costs.

It can be done by creating money to offset the contraction of credit, recapitalizing the banking system, and writing off or down the accumulated debt in an orderly manner. For best results, the three processes should be combined. This requires radical and unorthodox policy measures. If these measures were successful and credit started to expand, deflationary pressures would be replaced by the specter of inflation, and the authorities would have to drain the excess money supply from the economy almost as fast as they pumped it in. Of the two operations, the second is likely to prove both technically and politically even more difficult than the first, but the alternative--global depression and world disorder--is unacceptable. There is no way to escape from a far-from-equilibrium situation--global deflation and depression--except by first inducing its opposite and then reducing it.

The size of the problem is even larger than it was in the 1930s. This can be seen from a simple calculation. Total credit outstanding was 160 percent of GDP in 1929, and it rose to 260 percent in 1932 due to the accumulation of debt and the decline of GDP. We entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt. And this calculation does not take into account the pervasive use of derivatives, which was absent in the 1930s but immensely complicates the current situation. The situation has been further aggravated by the haphazard and arbitrary way in which it was handled by the Bush administration. The public and the business community suffered a shock in the aftermath of the Lehman Brothers default, and the economy has fallen off a cliff. The next two quarters will show rapid deterioration.

To prevent the economy from sliding into a depression, President Obama must embark on a radical and comprehensive policy package that has five major components:

1. A fiscal stimulus package
2. A thorough overhaul of the mortgage system
3. Recapitalization of the banking system
4. An innovative energy policy
5. Reform of the international financial system

I shall briefly discuss each of these elements.

1. A Fiscal Stimulus Package

This is conventional wisdom, and I have nothing original to contribute. The fiscal stimulus package is already well advanced, and it will be the first out of the gate, but it will take time to implement and will serve merely to moderate the downturn. In my view the next two items are indispensable. To turn the economy around, the mortgage and banking systems need to be thoroughly reorganized and restarted.

2. A Thorough Overhaul of the Mortgage System

The collapse of the financial system started with the bursting of the U.S. housing bubble. There is a real danger now that house prices will overshoot on the downside and put further pressure on the banks' balance sheets. To prevent this, foreclosures must be reduced to a minimum and house ownership facilitated both for new buyers and current owners.

But we ought to go even further than that. With the mortgage financing industry in shambles, we ought to subject it to a thorough overhaul and introduce a new system that is free of the deficiencies that are responsible for our current difficulties. It is rare that a systemic change is necessary or even possible; the present is such an occasion.

I advocate adopting, with suitable modifications, the Danish system, which has proven its worth since it was first introduced after the Great Fire of Copenhagen in 1795. Our current system has broken down because the originators of mortgages have not retained any part of the credit risk. They are motivated to maximize their fee income. As agents, their interests are not identical with the interests of the ultimate owners. In the Danish system, the service companies retain the credit risk--they have to replace the mortgages that are in default.

In contrast to our reliance on government sponsored enterprises (GSEs)--namely Fannie Mae and Freddie Mac-- the Danish is an open system in which all mortgage originators participate on equal terms, and it operates without government guarantees. Yet Danish mortgage bonds are traditionally very highly rated; often they yield less than government bonds. This could not be replicated in the United States at present because of the demoralized state of the market, but it may be achieved later.

Danish mortgage bonds are highly standardized, and their distinguishing feature is that they are identical to and interchangeable with the underlying mortgages. House owners can redeem their mortgages at any time by purchasing the equivalent mortgage bond in the market and exchanging it for the mortgage. Since bond prices and house prices normally move in the same direction, this feature--called the principle of balance--reduces the chances of householders having negative equity in their houses. The mortgage originators are strictly regulated, and their interests are closely aligned with those of the bondholders. They pass on only the interest rate risk to bondholders, retaining the credit risk. That is why the bonds are so highly rated.

When Mexico wanted to securitize mortgages in order to promote house ownership, it opted, with my assistance, for the Danish system. My proposal was supported by the U.S. Treasury, which was then under the leadership of Paul O'Neill. The Danish model is clearly superior to the GSE model. The question is, how can you get there from here? Originally, I proposed a grand scheme in which all mortgages that are under water (i.e., whose principal amount exceeds the current market value of the house) would be replaced by a new mortgage, incorporating the Danish principle of balance but being insured by a government agency.

This would have had the advantage of removing the incentive to default in order to obtain the benefits of loan modification, but it would have run into insuperable political and even constitutional difficulties. The slicing and dicing of CDOs has created such conflicts of interest amongst the holders of various tranches that neither a voluntary nor a compulsory scheme of reorganization is possible. Abandoning the search for an optimal solution, I have come to realize that a second best solution is readily available.

The GSEs have become effectively government owned, but the government is not exercising its powers of control. They are in limbo, torn between the interests of their shareholders and the public. The prospect of the shareholders emerging with a positive value is imaginary; nevertheless, the GSEs are trying to make a profit from their quasi-monopolistic position, charging heavy fees and imposing restrictive conditions on both refinancing applications and new ones. This is aggravating the housing problem, but it could easily be changed by a newly established regulator asserting its authority and using the GSEs as an instrument of public policy.

The GSEs could then introduce a new type of mortgage contract based on the Danish model. It would be transparent and uniform, and it would incorporate the principle of balance. The GSEs would reduce their fees, extend the limit on the size of mortgages they are willing to guarantee, and introduce a new line of guarantees--up to 90 percent of appraised value at a higher premium--effectively replacing the private mortgage insurance companies that have become inactive.

They would then introduce a streamlined and cheap refinancing process for existing mortgages. That would greatly reduce the cost of conforming mortgages and create a powerful incentive to convert nonconforming mortgages into conforming ones. Owners of defaulting mortgages could avail themselves of the provisions of the Help for Homeowners Act and realize 85 percent of the appraised value. In most cases this would be preferable to going through a costly foreclosure process. If owners failed to choose that route, it could be imposed on them by a judge in a simplified bankruptcy process. One way or another, the number of foreclosures would be greatly reduced, and with mortgages more freely available at lower cost, house prices would stabilize at a higher level than would otherwise be the case. Financial institutions would recover some of their losses on residential mortgages and securities.

It is ironic that the GSEs, which are at the root of the problem, should provide a route to the solution. In the long run the GSEs should be phased out and their portfolios run off. They would become a government agency in charge of mortgage guarantees issued by the government. Eventually, when the modified Danish model becomes firmly established, even that function could be phased out. Under the new system, mortgage origination companies would remain responsible for the first 10 percent of any losses arising out of default. They would be allowed to charge a fee that would be determined by competition. As the system matures, service companies may find it advantageous to accept the entire credit risk and not pay a fee for government guarantees. The system would then come to reflect the Danish model more faithfully.

The sequence of the GSEs first becoming more important and then fading away resembles the sequence that characterizes the entire process--to escape deflation you first induce inflation and then reduce it. In implementing it we should never forget what went wrong with communism: the state did not fade away. The fading away should be part of the plan from inception.*

The whole process could be accomplished by using the GSEs and the new bankruptcy law currently under consideration by Congress. The government already controls the GSEs; all it has to do is to exercise its powers. The cramdown provisions of the proposed new bankruptcy law face active opposition from many financial institutions holding mortgages; it should be possible to persuade them that most of them would benefit from the mortgage reorganization scheme outlined here. The costs to the taxpayers would manifest themselves through the eventual losses incurred by the GSEs, but, considering the impact on house prices and the economy, the net effect is likely to be positive.

3. Recapitalization of the Banking System

I cannot present as clear a picture of what a reformed banking system would look like as I can for the mortgage system because there are no suitable models to invoke. The Spanish banking system has weathered a bigger boom in house construction better than the U.S. banking system, and it has some desirable features, but Spain is even more adversely affected by the Crash of 2008 than the United States. What happened to the U.S. banking system after the Great Depression certainly does not present a desirable model. Banks were put into a straightjacket whose constraints began to be loosened only in the 1970s. We are in uncharted territory.

I summed up the main lessons to be learned from the current financial crisis in the previous edition of this book: Financial markets do not tend toward equilibrium, and deviations are not random. Credit creation and contraction are reflexive and tend to occur in initially self-reinforcing but eventually self-defeating boom-bust sequences. Therefore it is not enough to regulate the money supply; it is also necessary to regulate credit conditions. This involves reactivating policy tools that have fallen into disuse: variable margin and minimum capital requirements, and central bank directives on bank lending to particular sectors. Not only banks but all institutions involved in credit creation must be subject to regulation. The objective is to maintain stability and prevent mispricing and other excesses from becoming self- reinforcing. The same applies to financial instruments: They need to be licensed and supervised to ensure that they are uniform and transparent and do not destabilize markets. Leverage must be used cautiously: It is not enough to allow for quantifiable risks; one must impose an additional safety margin for the uncertainties inherent in reflexivity. Financial engineering, structured finance, and other innovations are of dubious value; insofar as they circumvent regulations or render them ineffective, they can be harmful.

It is clear, in the light of these observations, that the financial sector became far too big and profitable. In the future it will have to shrink and remain within the control of the authorities. While financial markets became global, the authorities remained national. Since global markets are beneficial, the authorities must also become more international and the international financial institutions must serve the interests of all their members more equitably.

Since the publication of the previous edition of this book, financial markets have completely collapsed and had to be put on artificial life support. Keeping them alive and preventing the world economy from sliding into depression has to take precedence over all other considerations. As we have seen, the economy can be turned around only in two steps. The first is to offset the collapse of credit by creating money, writing off bad debt, and recapitalizing the banks. Then, if and when that succeeds, the excess money supply will have to be drained as fast as credit begins to flow. That means the initial policy measures will take us in exactly the opposite direction from our eventual destination. Nevertheless, the ultimate destination ought to inform the design of the initial step. Unfortunately, Treasury Secretary Henry Paulson reacted in a haphazard and capricious manner. That is how the situation spun out of control. After the bankruptcy of Lehman Brothers, he forced through Congress a $700 billion rescue package without any clear idea how it should be used to adequately recapitalize the banks. I explained how it should be done in an article published by the Financial Times online on October 1, 2008, at the height of the Congressional debate. This is what I proposed:

The Treasury secretary would give bank examiners clear guidelines for how assets should be valued. For instance, it would be postulated that commercial real estate will on average lose 30 percent of its value. He would then ask the examiners to establish how much additional equity capital each bank needs in order to be properly capitalized according to existing capital requirements. If managements could not raise equity from the private sector, they could turn to the Treasury. The Treasury would offer to underwrite an issue of convertible preference shares. The preference shares would carry a low coupon (say 5 percent) so that banks would find it profitable to continue lending, but shareholders would be heavily diluted by the convertibility feature. They would be given the right, however, to subscribe on the Treasury's terms, and if they exercised their rights, they would avoid dilution. The rights would be tradeable, and the Treasury would seek to set the terms so that the rights would have a positive value. Private investors, including me, may be interested in buying the shares of some banks on the same terms as the Treasury.

After recapitalization, minimum capital requirements would be lowered to, say, 6 percent. This would encourage banks to lend because they could suffer a further 25 percent depreciation of assets without violating statutory limits. They would be eager to take advantage of the rich margins currently prevailing. The economy would be reactivated. With everyone sitting on a lot of liquidity and suddenly eager to put it to work, there would be a sudden rush into less liquid assets. Deflation would be replaced by the specter of inflation, and liquidity would have to be drained as fast as it had been pumped in. Minimum capital requirements would then be raised first to 8 percent, then higher. In this way, the leverage of the banking system would be reduced, which is a desirable long-term objective.

If TARP (the Troubled Asset Relief Program) had been implemented in this way originally, the banking system could have been recapitalized with $700 billion, or perhaps even less. Unfortunately, half that money has already been spent, and most of the second half of TARP will also be needed to plug the holes that have already developed. What would have been possible then is no longer realistic. That is a distinguishing feature of financial crises and other far-from-equilibrium conditions: What is appropriate at one point in time is no longer valid at the next one.

Adequate recapitalization of the banking system now faces two seemingly insuperable obstacles. One is that Treasury Secretary Henry Paulson has poisoned the well by the arbitrary and ill-considered way he forced through and implemented the $700 billion TARP program. The Obama administration feels that it cannot ask Congress for more money. The other is that the hole in the banks' balance sheets has become much bigger since TARP was introduced. The assets of the banks--real estate, securities, and consumer and commercial loans--have continued to deteriorate, and the market value of banks' stocks has continued to decline. It is estimated that something in the neighborhood of an additional trillion-and-a-half dollars would be required to adequately recapitalize the banks. Since their total market capitalization has fallen to about a trillion dollars, this raises the specter of nationalization, which is politically--and even culturally--unpalatable.

Consequently, the administration is constrained to do what is possible even if it falls short of what is necessary. It plans to carve out up to $100 billion from the second tranche of TARP in order to set up an aggregator bank that would acquire toxic assets from the banks' balance sheets. By obtaining 10:1 leverage from the balance sheet of the Federal Reserve, the aggregator bank could have a trillion dollars at its disposal. That is not sufficient to cleanse the balance sheets of the banks and restart lending, but it would bring some welcome relief. The aggregator bank could serve as a useful interim measure except for the fact that it is liable to make it more difficult to obtain funding necessary for a proper recapitalization in the future. It will encounter all kinds of difficulties in valuing toxic securities and even if these could be overcome it will still end up as a covert subsidy to the banks by bidding up the price of their toxic assets. There will be tremendous political resistance to any further expenditure to bail out the banks. This will make it much more difficult to mobilize additional funds in the future. It would be a pity to take the aggregator bank route, especially when there is a way to adequately recapitalize the banks with the currently available resources.

Let me spell out how it could be done. The trick is not to remove the toxic assets from the balance sheets of the banks but to put them into a "side pocket" or "sidecar" as hedge funds are now doing with their illiquid assets. The appropriate amount of capital--equity and subordinated debt--would be sequestered in the side pocket. This would cleanse the balance sheets and create good banks, but leave them undercapitalized. The same trillion dollars that is currently destined to fund the aggregator bank could then be used to infuse capital into the good banks. Although the hole is bigger, a trillion dollars would be more than sufficient because it would be possible to mobilize significant amounts from the private sector.

In the current environment a good bank would enjoy exceptionally good margins. Margins would narrow as a result of competition but by then the banking system would be revitalized and nationalization avoided. The situation is analogous to a devastating hurricane depleting the capital of property insurance companies, raising insurance premiums, and attracting additional capital into the industry. The scheme I am proposing would minimize valuation problems and avoid providing a hidden subsidy to the banks. Exactly for that reason it is likely to encounter strong resistance from vested interests. Losses would first accrue to shareholders and debenture holders; only if they exceed a bank's capital would the FDIC be liable for the deficiency, as it is already. Shareholders would be severely diluted, but they would be given tradable rights to subscribe to the good bank, and if there is a positive residue in the side pocket, it would also revert to the good bank as of the date of the new issue, giving shareholders the benefit of any subsequent appreciation. The fact that debenture holders may lose money will make it more difficult to sell bank debentures in the future. But that is as it should be: Banks should not be as highly leveraged as they have recently been. Pension funds would suffer heavy losses; but that is preferable to taxpayers taking over those losses.

In addition to restarting bank lending, my scheme would resolve the moral hazard issue for a long time to come. The banking industry is accustomed to turning to the state in a crisis and effectively demanding a bailout on the grounds that financial capital has to be protected to ensure the proper functioning of the economy. Given the aversion to state ownership of banks, the blackmail has always worked. That is how the bubble grew so large. The Obama administration ought to resist the blackmail and adopt the scheme outlined here as a prelude to building a better financial system. Our future depends on it.

4. An Innovative Energy Policy

Energy policy could play a much more innovative role in counteracting both recession and deflation. The American consumer can no longer act as the motor of the global economy. A new motor is needed. Alternative energies and energy savings could serve as that motor, but only if the price of conventional fuels is kept high enough to justify investing in them. That might also help to moderate price deflation. A high price on conventional fuels would be beneficial on both counts, but it would be hard to sell to the public. Until now, no politician dared to do so.

President Obama would need great courage and great skill to do the right thing. This would involve putting a floor under the price of fossil fuels by

a) imposing a price on carbon emissions by (a) a carbon tax or (b) auctioning pollution licenses (the former would be more efficient, the latter is politically more acceptable) and

b) imposing import duties on oil to keep the domestic price above, say, $70 per barrel.

The anticipated income from carbon emissions should then be distributed to households in full and in advance. This would compensate them for the higher cost of energy and hopefully make the scheme politically acceptable. It would also act as a temporary fiscal stimulus at a time when it is most needed, although most of it can be expected to be saved rather than spent. Gradually the price of carbon emissions would have to be raised to a level where it would pay to remove carbon from coal. This is indispensable for bringing climate change under control because there is no adequate substitute for coal-fired power plants except clean coal.

It is essential to convince the public that the cost of energy will remain high for some time in order to encourage investment in alternative energy and energy-saving devices. Eventually the cost of energy may decline as new technologies travel down the learning curve. We cannot depend on the price mechanism alone to ensure the development of new technologies. Tax concessions, subsidies, vehicle emissions standards, and building codes are also needed. Even so, neither energy security nor the control of global warming can be achieved without putting a price on carbon emissions. The United States cannot do it alone, but it cannot be done without the United States taking the lead.

5. Reform of the International Financial System

The fate of the United States is intimately interconnected with the rest of the world. The international financial system as it has evolved since the 1980s has been dominated by the United States and the Washington consensus. Far from providing a level playing field, it has favored the United States, to the detriment of the countries at the periphery. The United States exercises veto rights over the international financial institutions (IFIs)--the International Monetary Fund (IMF) and the World Bank. The periphery countries are subject to the market discipline dictated by the Washington consensus, but the United States is exempt from it. This has exposed the periphery countries to a series of financial crises and forced them to follow pro-cyclical fiscal policies, and it has allowed the United States to suck up the savings of the rest of the world and maintain an ever-increasing current account deficit. This trend might have continued indefinitely because the willingness of the United States to run a chronic current account deficit was matched by the willingness of other countries to run current account surpluses. It was brought to an end by the bursting of the housing bubble, which exposed the overindebtedness of the household sector.

The current financial crisis has revealed how unfair the system is because it originated in the United States, but it is doing more damage to the periphery than to the center. This damage to the periphery is a recent development, following the bankruptcy of Lehman Brothers, and its significance has not yet been fully recognized. The countries at the center have effectively guaranteed their bank deposits, but the periphery countries cannot offer similarly convincing guarantees. As a result, capital is fleeing the periphery, and it is difficult to roll over maturing loans. Exports suffer for the lack of trade finance. The IFIs are now faced with a novel task: to protect the countries of the periphery from a storm that has emanated from the center, namely the United States. The IFIs' future depends on how well they cope with that task. Unless they can provide significant assistance, they may become largely irrelevant. Global, multilateral arrangements are in danger of breaking down, turning the financial crisis into global disorder and depression.

Assistance is needed to

• protect the financial systems of periphery countries, including trade finance, and
• enable periphery governments to engage in countercyclical fiscal policies.

The former requires large contingency funds available at short notice for relatively short periods of time. The latter requires long-term financing.

When the adverse side effects of the Lehman bankruptcy on the periphery countries became evident, the IMF introduced a new short-term liquidity (STL) facility that allows countries that are otherwise in sound financial condition to borrow five times their quota for three months without any conditionality. But the size of the STL is too small to be of much use, especially while a potential stigma associated with the use of IMF funds lingers. Even if it worked, any help for the top-tier countries would merely aggravate the situation of the lower-tier countries. International assistance to enable periphery countries to engage in countercyclical policies has not even been considered.

The fact is that the IMF simply does not have enough money to offer meaningful relief. It has about $200 billion in uncommitted funds at its disposal, and the potential needs are much greater. What is to be done? The simplest solution is to create more money. The mechanism for issuing Special Drawing Rights (SDRs) already exists. All it takes to activate it is the approval of 85 percent of the membership. In the past the United States has been the holdout opposing it. Creating additional money supply is the right response to the collapse of credit. That is what the United States is doing domestically. Why not do it internationally? Ironically, SDR would not be of much use in providing short-term liquidity, but it would be very helpful in enabling periphery countries to engage in countercyclical policies. This would be done by rich countries lending or, preferably, donating their allocations to poor countries. The scheme has the merit that the IFIs would retain control over the disbursement of the lent or donated funds and ensure that they are spent in accordance with the poverty reduction programs that have already been prepared at the behest of the World Bank. This would especially benefit poorer countries that are liable to be hardest hit by the worldwide recession.

If it were implemented on a large scale--say $1 trillion--the SDR scheme could make a major contribution to both fighting the global recession and fulfilling the United Nations' Millennium Development Goals. This seemingly selfless act by rich countries would actually serve their enlightened self-interests because it would not only help turn around the global economy but also reinforce the market for their export industries. Since the SDR scheme is not of much use in providing short-term liquidity to periphery countries, that task would have to be accomplished by other means, notably the following three:

a) Chronic surplus countries could contribute to a trust fund that supplements the new STL facility. This would greatly enhance the value of that facility by removing the five-times-quota limitation. For instance, under STL Brazil can draw only $23.4 billion, while its own reserves are over $200 billion. A more flexible supplemental fund would give the STL facility more heft. Japan held out the promise of $100 billion. Other chronic surplus countries probably would not contribute unless the quota issue was reopened. Holding out the prospect of higher quotas could serve as an inducement to put together a supplemental fund that would be large enough to be convincing.

b) The central banks of the developed world should extend additional swap lines to developing countries, and they should accept assets denominated in local currencies to make them more effective. The IMF could play a role by guaranteeing the value of assets denominated in local currencies.

c) In the longer term, international banking regulations should facilitate credit flows to periphery countries. In the short term, the central banks of the developed countries should exert pressure on commercial banks under their aegis to roll over credit lines. This could be perhaps coordinated by the Bank for International Settlements.

With regard to enabling periphery countries to engage in countercyclical policies:

1. The major developed countries should, in addition to donating their SDR allocations, jointly guarantee, within agreed limits, longer-term government bond issues of periphery countries. Regional arrangements should be encouraged, provided they are within an international framework. For instance, the European Investment Bank and the European Bank for Reconstruction and Development should finance public works in Ukraine in conjunction with the IMF package. China's interest in Africa and other raw material-producing areas should be encouraged, provided China observes the Extractive Industries Transparency Initiative and other international standards.

2. The chronic surplus countries could be induced, by offering them additional voting rights, to invest a portion of their currency reserves or sovereign wealth funds in longerterm government bonds of less developed countries. This could be connected with the proposed trust fund supplementing the STL facility.

None of these measures is possible without opening up the vexed question of quota redistribution. This would be in the enlightened self-interest of both the United States and the European countries that would give up some of their voting rights, because in its absence the newly rich countries would have no interest in cooperating with the IMF. They would turn to bilateral or regional arrangements, and the IMF would become largely irrelevant. The question probably cannot be avoided anyhow, but it will take a long time to settle. The best course would be to obtain support for a large-scale SDR scheme by agreeing to open negotiations. President Obama would be fulfilling the world's expectations by championing this course. The main opposition is likely to come from Germany, but with U.S. leadership and broad international support it could be overcome.

In addition, many other international arrangements are needed:

• Banking regulations need to be internationally coordinated. This would be the task of a Basel Three accord. (Basel Two has been discredited by the financial crisis.)
• Market regulations also need to be global.
• National governments need to coordinate their macroeconomic policies in order to avoid wide currency swings and other disruptions.
• Commodity stabilization schemes ought to be considered. They could be particularly helpful for commodity dependent periphery countries and in counteracting the prevailing worldwide deflationary tendencies.

This is a condensed, almost shorthand, account of what needs to be done to turn the global economy around. It should give a sense of how difficult a task it is. It remains to be seen whether any of ideas laid out here are adopted as policy.

"The Crash of 2008 and What It Means " will be available in paperback on March 30th.

The eBook edition is available now at this link and wherever eBooks are sold.

 

 

Comments

[ChuckiePoo]

Rush Limbaugh and his Rat-Pack of Right-Wing Media Hyenas are now fulminating about Obama's new Foreclosure Assistance Bill which they say will help the "Losers" in our society. Homeowners who are now in default on their mortgages are America's "Losers", and do not deserve any assistance from taxpayers. This is Rush's idea of Dog-Eat-Dog, Winner-Take-All, Losers-Be- Damned Capitalism. The fact that Rush's plan would fill our streets and shelters with thousands more homeless families, and leave banks holding empty worthless homes with no payments being made to the banks at all doesn't seem to matter. Rush has an Ayn Rand "Fountainhead" ideology to defend, and he will defend that Far Right Extremist ideology to America's last dying breath. Well, in case Rush hasn't noticed, "Losers" are what the Republicans were in 2006 and, even more so, in 2008. By 2010 and 2012, Obama and the Democrats will own the Stimulus Bill and the Homeowners Assistance Bill, both of which will probably have proven very successful by then. The Republicans will own the title of Obstructionist Destructionists, in light of their fierce opposition to these recovery programs. And, by that time, the GOP and the Right-Wing will be the biggest Losers of all. If you think Republicans are Losers today, wait until 2012 -- "You Ain't Seen Nothin' Yet."

Please visit my Blog: "Conservatives Are America's Real Terrorists"
http://conservativesarecommunistss.blogspot.com/

[freshnotbitter]

My favorite part in this article by Soros is where he says the Danish system, which would have avoided the problem we are now facing, was proposed by him and supported by Paul O'Neill who was the Treasury Secretary at the time. Remember Paul O'Neil? He was Bush's first choice for SecTreas and Bush fired him because Paul wouldn't go along with Bush's stupidities. He also fired, more or less at the same time, his economic adviser, Laurence Lindsey, for saying that the Iraq war would cost more than $100 billion dollars. The Iraq war has now cost us over a trillion which is 10 times more than what Bush said it would be when he fired his economic adviser.

And we are wondering why we are in trouble?

Maybe we should start listening to the people who actually know what they are talking about and stop listening to the media supported goons who just feed us a lot of happy talk.

[DrSawyer]

The plan laid out by Mr. Soros makes two things perfectly clear about the bank bail out plan announced by Secretary Geithner:. 1) He does not want to put a fair market value on bank’s bad loans and toxic assets and 2) he doesn't want to "officially" take over the banks no matter what. As more and more Federal money flows into these institutions, the Federal government will solidify its de facto control of these banks that would be insolvent without tax payer dollars. The Federal government will "own" these banks, stockholders' investments will essentially be eliminated and the toxic assets will be written off or removed from the banks' balance sheets. This is inconsistent with growing sentiment in America to let the banks fail and be taken over by the Federal government.

The other alternative is outright nationalization, a swift decisive write down of toxic asset values through bank reorganization where bank management is replaced, common stock holders' investments are wiped out and tax payer dollars are used to keep the restructured banks going. This is essentially the same outcome. The only question is how we get there.

Regardless of the approach, a lot more than the remaining $350 billion of bail out money will be needed and all banks will not be saved. This is going to be a painful expensive process but we will end up with better banks and much better bank better regulation.

Dr. Granville M. Sawyer, Jr.
Professor of Finance
Bowie State University

[yoyos]

Soros’s “side-pocket” solution for the toxic assets banks have is interesting, but has the problem of leaving those who got us into the credit mess responsible, as managers of the banks, for getting us out. A better version of this is the concept of creating “good” banks with no toxic assets, and letting the bad banks deal with their junk, as proposed by Willem Buiter. He is a heavyweight. For example, he was called in as an advisor to Iceland after their economy collapses some months ago.

Buiter’s very interesting proposal deals with two very important issues: getting good banks going that will lend, restarting the economies of the world, and isolating the damage from the toxic assets that are going to bury many banks so that the good banks can function. His ideas are consistent with the Soros proposal. His last column and another recent one describing his thoughts can be found at:
http://blogs.ft.com/maverecon/

An excellent discussion between Bill Moyers and Simon Johnson, which aired on Friday, is geting widespread attention. Johnson spells out clearly why those now in charge of the banks should not be given more money. The discussion is consistent with the Buiter ideas.
http://www.pbs.org/moyers/journal/02132009/watch.html

[AMP43]

We are seeing a criminal activity of the highest order- Goldman Sachs is taking over our country

[senorlou]

That was nice of Mr. Soros to try to help us out with his ideas. Problem is, we're so deep now in this worsening crisis. We lived beyond our means for decades. We believed Wall St. flim-flam dealers who told us to put our retirement with them. We bought homes for profit, not because we wanted a home. Bottom line, we've been living like dopes for years. It only took one administration to set the whole house of cards tumbling down. Now, we've got a decent President, and a Congress that has stopped digging the hole and is trying to repair the damage, if that is even possible. Hopefully, they'll listen to guys like Soros, and listen less to the GOP, who got us into every mess we're now in.

[billw8017]

George Soros knows finance, and his observations deserve serious regard. His innovative energy policy doesn't read so well except he says energy prices have to rise to make innovation competitive. Particularly jarring is the remark about taking the carbon out of coal. Coal IS carbon. There are usually impurities, but nobody recommends burning the sulfur or, for that matter, the associated atmospheric nitrogen. When the sufates and nitrates dissolve, they make acid rain. Nitric acid especially attacks living tissue.

Burning wood and fossil fuels is all about burning carbon.

[norkas]

Some of the items Soros mentions will be done but i believe Barak Obama should follow almost all of the advice he suggested.

I am not a fan of George Soros but truly belive he has some great ideas and advice to give.

If Barak Obama wants to make the good moves he needs to now i would have a long talk with Soros and ask my other advisers including CEO of Google in one it.

[David Sirkin]

Soros (or his editor?) actually made only a minor semantic error. According to Wikipedia, "clean coal" technology refers to washing impurities from the coal, but also to other treatments either of the coal prior to burning, or to the flue gas that results from the burning. The latter treatments include "carbon capture," by which carbon dioxide in the flue gas is prevented from going into the atmosphere.

[WASanford]

While I’m neither an economist nor a wealthy investor, I’m certain that what happened to us isn’t all that mysterious. An economy lives on the flow of its money and when the money stops flowing, the economy stops. During the 90’s and the beginning of the 21st century we’ve been bailing up our money and sending it around the world. So far as I know, America has never enjoyed a positive balance of trade. Matters were made worse by our dependence on credit to inject money into our economy. That method was inadequate to keep up with the drain and a worker can service only so much debt depending on his/her wage.

Eventually it had to come to a head and it did when the “teaser” rates on mortgages ran out and interest rates began resetting. That caused foreclosures to build into a tidal wave that just keeps on coming. That is the genesis of our problem. It’s exacerbated by the fact that as prices were going up, wages remained flat; an unsustainable circumstance if there ever was one. Prices are in free fall and if nothing is done they will continue to fall. This is deflation and it’s much worse than inflation. Allowed to continue it will destroy every business in America.

Soros is right? We need to inject new money into our system, preferably at the bottom of our economy, increase wages to meet falling prices, and reinstate the Glass-Stiegel act.

[dgscol]

This will not work. There are no international laws governing this sort of banking, and it would be prone to corruption and failure once again, and that is the collapse Soros says he wants to prevent.

[HaveFaith]

the problem with the banks is that no one is supporting them anymore. If the people become shareholders by using their own money, not borrowed money, to invest in the banks while their stock is at rock bottom prices, it would restore confidence in the system and allow the banks to clean up their troubled assests. I don't think it is a good idea to spend money that our future grandkids have to pay for. It would be wise for the banks to promote a sale of stock so that instead of a few very rich holding stock, the average person could own stocks and the company would truly be publicly owned. Not by tax dollars through the government, but by real people who have real money to buy stocks. Not everyone is unemployed and with Citi going for $3 a share, the average person could by 1000 shares for 3000.00 and hold the stock.

We also have to invest in replenishing the earth through conservation to undo all the damage that has been done. That is where the future is and that is how jobs would be created. We need creativity and innovation instead of doom and gloom.

[SOLERSO68]

How are we going to "invest in replenishing the earth" without borrowing the money for that also? everyone wants to invoke the deficit to undercut spending they dont like, then propose some spending they DO like in the next breath. The deficit isnt going to go away because we dont take the measures to stabalize the economy and it WILL go up. Our problems (including the deficit) are due to the systemic and idealogical malfunctions of the past 30 years. We shouldnt leave "our grandchildren" that mess either. the deficit is only one problem of many.

[ntmessage]

Dear Mr. Soros,

You must disclose your funds positions in order to be trusted regarding this debate, especially given your participation in the collapse of the British currency the Pound Sterling.

Yes we know that imbalances exist, especially now and that investors, speculators and others are incented to take advantage of these circumstances, many betting against the United States of America whom possess huge amounts of funds, levered to the Trillions on dark exchanges overseas and within sovereign funds.

However, few will argue that the markets are now rife with the kind of rhetoric, discourse and self-interest driven rumors that resembles the precursor to the same types of hysteria that accelerated the negative feedback loop that collapsed the United Kingdom and now threatens to down our country and economy.

Once full disclosure is given and no conflicts exist, I believe someone of your stature can provide a tremendous amount of help and leadership that we desperately need.

[John Hammink]

Dear Mr. Soros,

Thanks for your insight and perspective into this issue. As someone becoming more increasingly interested in mathematics and their application, I'd love to see some examples in how your approaches might work with actual numbers.

More importantly, as we need this kind of input to sort out the situation, why not make your book available for free? Alot of us may not be able to afford it right now.

[joanndarc]

Thank you, George!

As a chemist (and once upon a time Soros fund supported student) i can tell that CLEAN COAL CANNOT EXIST!

[vegasobserver]

Not even with 100% carbon sequestration?

Assume that 100% of the carbon residue from a coal plant is pumped deep into the earth, or combined with some kind of mineral which traps it.

Yes, the byproducts from the burning process are dirty, therefore the burning process is dirty, but the OVERALL process, including the disposition of the byproducts, is clean, because the hydrocarbon waste does not enter the environment.

I'm not advocating clean coal necessarily (I still think nuclear is better), but to say it can't exist is misleading.

[Wake-up]

Funny how you-all want this bill to be passed BEFORE anyone has a chance to read the 1000+ pages that's in it...

If you're so sure this is the best thing for America, then you should have no problem letting ever tax payer know what's in it!!

[GardenerNorCal]

That's what happenned with NAFTA nobody had read it but almost all were for it. How does that happen?

[Wake-up]

Excuse me? NAFTA was not RUSHED through in day... it was debated analyzed, etc.

This thing is obviously getting rushed through because they don't want us to actually see / know what's in it.

[WASanford]

That's hogwash! Anyone who followed the writing of this bill knew everything they needed to know when deciding whether or not to support it. What happened, weren't the Repugnants paying attention?

[rbchilds]

No, actually holding the President to his word, something that doesn't seem to sit quite well with liberals. Go to www.barackobama.com and learn about his deception and lying, it's his web-site, unless of course you do not believe "The Truth Will Set You Free".

Sunlight Before Signing: Too often bills are rushed through Congress and to the president before the public has the opportunity to review them. As president, Obama will not sign any non-emergency bill without giving the American public an opportunity to review and comment on the White House website for five days.

Doesn't qualify for an emergency if he can wait 4 days to sign the measure, but only allow congress hours before vote on the final bill.

[Artos]

These are some additional ideas our government needs to do immediately in order to save America.
1. Stop the war in Iraq now
2. Get out of Afghanistan now.
3. Pull all American forces out of Foreign nations.
4. Halt all foreign aide immediately and only give what is absolutely necessary. No more free rides to anyone.
5. Investigate Halliburton and any other Contractors to find out how much money they stole from the U.S. Treasury.
6. Force all the present or former CEOs of Corporations and Banks who have or are now receiving bailout funds to give back every dime of bonuses and part of their pay at the risk of going to jail. No one should be rewarded for failure, and these CEOs would be the first to say that, especially when it comes to the worker bees. This would apply the rule to them as well.

[JXJASON]

Artos, Well said. I agree with you on all six of your ideas. I have said these things to my US Senators and my Congressman for two years.

All you readers should complain to your Senators and Congressman too.

If they do not listen, vote them out of office.

[islandsox]

What dumb ideas these are. You will kill global economies and income to the USA by doing these things. And no other country will buy anything we want to sell. That's just plain stupid. We will become completely alienated if we do what you think we should. Could you give us your background as to why you come to these conclusions? What expertise? I'd listen if you would provide your expertise. Taking on bank toxic assets is useless; there can be no value associated with them; they are losses. And your presenting the idea of pulling out of Iraq and Afghanistan is the dumbest thing I've ever heard. Have you even considered how valuable it would be to have two countries that are democracies? You aren't looking past the trees for the forest. Everyone just wants "no more war" but what if, just what if, it helps millions of people to succeed in these regions? You are way too negative.

[joanndarc]

Hahaha, are you trying to dismantle Modern Imperialism? :)

[David Sirkin]

Soros is right that giving generously to the poorest countries in the world is in our enlightened self-interest. What he does not mention, however, is that population growth in the US and worldwide is the greatest ongoing threat to our long-term prosperity. We need to put a curb on immigration, and we need to support very generously family planning efforts both in the US and around the world.

See my webiste for elaboration on the effect of population growth on wealth:

http://www.thoughtsforprogress.us