Friday, September 26, 2008

John Kenneth Galbreath on the bailout

Okay, first of all, I didn't even know John Kenneth Galbreath was still alive. What is he, like 150 years old now? And, second, it scares me out of my tree to even admit he makes sense. But here he is, making sense at 150:

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

With this solution, the systemic financial threat should go away. Does that mean the economy would quickly recover? No. Sadly, it does not. Two vast economic problems will confront the next president immediately. First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won't be enough.

Oh, and notice the Galbreath appears to be closer to House Republicans than to Nancy Pelosi and the rest of her San Francisco Democrats.

Who woulda' thunk it.

1 comment:

Anonymous said...

I'm reading "The Predator State" right now. It's almost exciting! I'm just beginning the 'what to do' about the predators.

Ya know what? I want to see people o to jail and civil charges to recoup the money. The crime? FRAUD - obfuscating the realities to hide the truth that they were speculating with imaginary money (promises). Mortgage loan sharks, banks avoiding due diligence, crooked appraisers, and homeowners who falsified records to get their dodgy loans.