It was announced recently that congress and the president are going to pass a package that cuts checks for every American to the tune of $600. Now I’m not the kind of person who likes to turn down money that is being handed to me, especially money that initially was mine to start with. However…
How is this going to solve anything in the deep and murky waters of deficit spending and SIVs and CDOs and multi-billion dollar finance? Ok it isn’t, it’s hush money. It’s “please don’t fire me” bribes from politicians who know the public will be out for blood at some point, and they want to give the impression that they are actually doing something. But the truth is (as much as I like to pick on politicians) this isn’t their fault. At least not entirely. But dropping $150 billion into a completely useless spending package when that money could be used for any number of other useful causes can only sourced in fear of their job at the hands of the voters who will “toss the bums out” because this happened on their watch.
The truth about the financial crisis goes deeper, via things like the situation with Ambac, and the deepening crisis in how much debt corporations have allowed themselves to operate in. Sure you can make an argument for poor federal oversight here, but really this one stands firmly at the feet of the corporate risk management. They failed. Because they failed, nearly 100% across the board, we find our economy in the toilet. So inevitably, we will see corporations seeking funding to cover their debt, CEO job loss, and other “adjustments” along with a growing likelihood of some further federal response. I’d be willing to bet that after we get out of the immediate election year crisis of making voters feel good, we will see some people trying to pass fairly broad laws on how to regulate this issue “so it won’t happen again”.
There are lots of ways to solve this, but I’ll toss my thought into the ring here first. Then I’ll be contacting my congressional and senate reps to see if this can be used as a means to settle the crisis down. Please note: I’m certainly no economist so this could be be pure madness. But it sounds good to me 🙂
First, large institutions like banks and bond insurers need capital, to cover the losses in case they all came due at once. Hopefully that is still avoidable, but hope is not a strategy. Second, the government wants to be able to monitor and control and appear to be doing something about this, to both bring things out of the downward trend, but more importantly, to reassure the constituents that they are accomplishing things on big issues. Third, this one being my opinion and feeling, the measures must be temporary such that the markets can move back to less regulation after the crisis is over and the markets have stabilized.
So instead of giving out $150 billion in checks which may not arrive until summer how about having our government buy stock from the troubled companies? It gives the cash to the places that need it, and makes the government (hopefully via the fed and some actual economists) a seat at the stockholders table. We know that the corporations listen when that group speaks. So with $11+ billion in writedowns at Citi, and other Banks hitting $2-8 billion why not just drop an $11 billion stock purchase on them from Uncle Sam? I don’t know the ratios of investments, but I’d be willing to bet that investment at this levels gets a seat on the board 🙂
Now the US gets a say in the operations of the bank or insurers that are in trouble, they get cash, and things can stabilize, if not improve, oh yeah and we likely spent less than $150 billion. Now as things improve, the companies can buy back the stock from the US, slowly or in large chuncks as capital permits, which regains their autonomy from the government. If they never choose to buy back, they stay regulated, if they choose to buy back some or all then they move back to less regulated model.
Oh yeah, and politicians… not only does it looks like you did something with this plan. You actually did.