Liberal economist James Galbraith has already written two or more op-eds, the first along the lines of Krugman suggesting essential modifications to Paulson plan, but the later one, which I like better, abandons the TARP bailout concept altogether and suggests other measures to help the general economy instead:
<a href=http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html>nobailout</a>
Over at Business Week, there is great argument that bailout likely won't work even after costing us a trillion, and in the end we'll simply have to take over institutions anyway (the RTC/RFC model). From that point of view, the bailout is a likely loss, we'd better save our chips for a real solution later.
<a href=http://www.businessweek.com/magazine/content/08_40/b4102000326748.htm>BW</a>
They argue well that the proposal is a "Free-Market Bailout", a contradiction in terms, but fit well with the free market ideology of Paulson (well, hypocritically speaking).
Nader had some more really good ideas:
http://www.thenation.com/doc/20081013/nader
Stiglitz:
http://www.thenation.com/doc/20081013/stiglitz
I really enjoyed this one, which does a fun job of explaining how we got here (though nothing can touch "The Large Badloan Collider" linked earlier in this list). I borrowed a lot from this in my letter below.
http://financialroadtosocialism.blogspot.com/
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After digesting the above and a lot more, I sent the following letter to Sen. Kay Bailey Hutchison after posting on a generally conservative listserv. I highlighted Galbraith's plan, and particularly the FDIC expansion part, thinking it would be more attractive to conservatives than bottom-up approaches.
BTW, the rest of Galbraith's plan is bottom up.
I've read about 30 different proposals to deal with the current credit crisis, and most of them are better than what is being considered by Congress.
A big problem is that the proposed solution of buying "toxic waste" (technical term) assets from banks (from banks all over the world, BTW) at high prices basically won't even fix the problem. It will just make the country (and most of us) $700+ Billion poorer, while making Wall Street crooks and incompetents richer. Then once we've blown through that money, we'll have to find the real solution, which will be that much harder since we'll be that much poorer.
The current problem is a "lemons" problem, as described in 2000 Nobel Prize winning research, "lemon" referring to a defective product. Wall Street has sold too many lemon mortgage backed securities, now no private buyers want to touch them, or invest in banks that hold them. The current going rate is 20 cents on the dollar of "good" securities. Wall Street says they're worth 65 cents, even discounted for risk and such, and nobody wants to sell for much less than that. So there's an impasse between buyers and sellers, and the market for US financial securities has collapsed.
The shaky theory behind the Paulson proposal and all modifications to it is that if the government steps in and massively buys a large amount of these securities (but not all...that would be impossible) at, say, 64 cents on the dollar, that will boost investor confidence and the prices will come back up again.
But think about this. Would you buy Chinese powdered milk? Most likely China produces many tons of perfectly good powdered milk. But recently they were found to produce toxic powdered milk that resulted in the deaths of some children. So now, nobody who can avoid it wants to buy Chinese powdered milk. So what if the Chinese government steps in and buys 100,000 tons of powdered milk and feeds it to Chinese babies. Would that convince you that it's safe now? You might wonder if they're just buying the good stuff and selling the toxic stuff to foreigners.
That's how "lemon" problems work. Once you destroy your reputation, it's like hell getting it back again.
As a country, we've got to get our good reputation back. But simply having our government buy up our own junk is not going to do that. Everyone can see that's nothing but a stupid money-burning PR stunt. Especially when we're buying them (and further enriching and rewarding) the very fraudsters who created them in the first place. What is that going to make people in other countries think? Would you buy securities from a den of theives?
We've got to establish new solidly enforced regulations that assure the quality of our securities and prove to others that we actually enforce them.
Remember the Japanese "OK" seal? Back in the 50's, Japan was not necessarily known for producing quality products. So the government instituted a rigorous quality assurance program. Over time, they became renowned for producing some of the highest quality products in the world. (BTW, in the 19th century, before they had a industrial economy, Japanese were most often considered "lazy". But once they had an industrial economy that provided opportunities for individual development and success, all that changed.)
The alternative plan which is actually worse than the Paulson plan is the plan put forward by some Republicans in Congress, which calls for further deregulation and capital gains tax cuts. It was deregulation that caused this problem, and only GOOD re-regulation can fix it. And tax cuts don't do any good for banking firms that are having huge losses...they don't have to pay any taxes anyway. And more tax cuts won't help our budget deficits, which is yet another problem.
One proposal I've seen is pretty simple. Eliminate the cap on FDIC insurance, so people aren't limited to $100,000 in any one account. Then money market funds will rush into commercial banks because they are guaranteed safe by the US Government, making the banks stronger, and once again able to issue loans It will "recapitalize" the banks. It may not help Wall Street, but the big 5 Wall Street firms no longer exist in their previous form anyway, so who exactly are we trying to save? The only two top Wall Street firms left standing just converted themselves into regular banks. If those mortgage backed securities are actually worth what Wall Street thinks, they'll work just as good as any other (properly discounted) assets for a commercial bank, even if they can't be sold for awhile. Banks are in the business of handling illiquid assets, not necessarily trading them like Wall Street does. Those assets are called loans.
This was one point of a several point proposal by Jim Galbraith, economics professor at UT.
The important thing is that we get credit flowing again. Things don't have to work exactly like they used to; in fact, they shouldn't or we'll never get out of this mess. If Wall Street crooks have to eat some losses of their own creation in the process, that's more justice for them.
Charles Peterson San Antonio, TX