Pearlstein argues that you can try to prevent a financial catastrophe or you can teach Wall Street executives a lesson, but you can't do both at the same time.
He's right, as he is about the current obsession with Wall Street executives' compensation. Total every stock option, bonus, liquid lunch, and town car ride in the past 10 years and you still have a drop in the bucket, a splash, compared to the consequences of a global financial calamity.
The nation, and, if they choose, the world's other major economies, can address executive salaries and compensation later, after the crisis has been resolved and markets have normalized.
And right now, markets are hardly normal, something that all in Congress and those inside the beltway need to remain focused on.
It seems hard to fathom, but some in Congress believe their local economies on the plains of Kansas or in suburban Indiana won't be affected by a potential financial panic the world has not seen the likes of in more than 50 years. Well, for those who need it, here's a refresher. Banks continue to hoard cash and are increasingly hesitant to lend to one another. Credit is drying up. Soon, citizens won't be able to get loans for auto purchases, new student loans will become scare, and small businesses will not be able to get any credit. Many large corporations will not be able to access capital for operations. This means fewer people shopping, fewer students going to school, a cutback in employment at small businesses, and many other negative consequences. And this will occur in small towns in the Midwest, on the plains of Kansas, as well as in the suburbs around Boston.
In short, Congress needs to act soon to keep credit markets functioning, be it buying distressed/at-risk assets, preventing foreclosures, or by injecting fresh capital into troubled banks, or by a combination. That must be the paramount concern.
Pearlstein offered another option: structure the rescue around a new, government-owned corporation capitalized with an initial $100 billion in taxpayer funds. The new corporation would swap dividend-paying preferred stock for distressed securities currently in the marketplace. Banks could use the shares to boost their capital, and the plan also limits the governments' exposure to $100 billion, with further losses borne by other shareholders. If the plan succeeds, both the government and the banks would share in the profits.
Parting Point: In the final analysis, it may take multiple, cash-infusion strategies to address the problem presented by mortgage-backed securities and their cousins. But Pearlstein's option is welcome. Investors/readers should also note that Pearlstein did not mention another round of tax cuts and/or regulation reduction as part of a sensible, credible solution to the financial crisis.
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Reader Comments (Page 1 of 1)
9-26-2008 @ 12:51PM
gary said...
It seems like business as usual for the congress. Lets put a bandaid on the problem and hope it heals itself. These members of congress are so use to looking out for there interests that they forget that there are prople out here suffering because of this mess that they created. But with every one of them having there hands in the pockets of the tax payers do you or anyone for that matter think for an instant that this problem will be solved properly. Not me for one!!! Congress will continue to make up laws as they go along neglecting to get to the root, the cause of the problem as always. Most of them need to be removed from there jobs because of this reason alone.
9-26-2008 @ 1:15PM
ynot said...
You know it's a horrible plan when the dumbocrats who got us into this mess support President Bush. I say after they finally come up with a plan that passes, all the members of congress go on a 50 state tour, where every person in this country can come up and kick them in the A$$.
9-30-2008 @ 4:31PM
Greg K said...
This article is just plain wrong. The last 16 attempts to inflate the bubble with extra money have failed miserably and each time the US economy was "on a sound footing" and we were okay. Then the next crisis hit.
People are revolting against helping the rich fat liars in all the financial banking system. This saving of wall street doesn't mean anything. Ever notice every time we have bad news for Americans it's good news for wall street and stocks go up? Wonder why? Because so much of their companies are based overseas and offshored they make most of their profits off shore from cheap goods dumped on the US. So they are setup to prosper against our lack of prosperity.
The inflation bubbles have been worse and worse and it's time to pay the piper. This means pain now, but it will be much worse if we don't let some companies even most of the banks take their lumps now. We are going to have to implement a 3 to 10 step plan and that involves a lot of things and all the important parts of these plans are NOT EVEN IN THE BAILOUT plan. The bailout plan is to save the banks but creates a NEXT greater depression. All balance sheets in the banks will be as useless as most asset values instruments are now because of random seisures and unknown impulsive actions on whichever banks are randomly targeted due to the plan. It's not a plan it's a breaking down of any chance to fix the accounting or "lack of accounting" mess we have already.
The author has taken the mystery pill of the matrix and believes in unlimited borrowing and that we can borrow our way out of any problem. But that's exactly the problem we have now. We have no productivity but pretend, fantasy bubble growth that must burst. Let it burst now the fall will be less than when it has another 2 trillion of debt more in it to burst later.