There has been much fear mongering in Washington over the last year as the financial crisis has built to a boil. But despite the most recent efforts to scare Congress and the American people into action, there has been very little light shed on some basic questions.
And I believe that before another penny of American taxpayers money is spent, our leaders need to spend more time explaining what is going on and why change is required. What we are facing is a crisis of confidence -- we are witnessing the erosion of trust in our leaders and our financial system.
People no longer believe our leaders have our best interests at heart. In the wake of the Auction Rate Securities scandal, people doubt the basic fairness of our system. People do not know the details of their accounts -- for instance few people have read the prospectus of their money market funds. And there is a lack of powerful ideas to sustain people's belief in the system.
To overcome these important challenges, people need answers to three fundamental questions:
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How did our system get to this point? Five basic problems: securitization, too much borrowing, skewed incentives, lack of transparency, and global interconnectedness of markets. For more on this point, click here.
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What should we do now? The answer depends on who you are. Families need to find safe banks in which to deposit their money; banks need to reduce assets and raise capital, find a merger partner, or shut down; companies need to conserve their capital; and government needs to restore trust in the system. For more on this point, click here.
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What should our financial architecture be? We should design a new system that solves the problems with the current one and encourages savings, innovation, and honesty. For more on this point, click here.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter











Reader Comments (Page 1 of 2)
9-26-2008 @ 9:20PM
A.C. Lohr said...
Check out anncoulter.com web page for a real eye opener.
9-27-2008 @ 2:22PM
Mike said...
This idea sounds just crazy enough to possibly work, so
naturally it won't be given serious consideration. How
great is our bureaucracy!!
I'm against the $85,000,000,000.00 bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to
America in a We Deserve It Dividend.
To make the math simple, let's assume there are
200,000,000 bonafide U.S. Citizens 18+. (That has paid US taxes in their lifetime).
Our population is about 301,000,000 +/- counting every
man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that
equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We
Deserve It Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in
their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your
family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads
Put away money for college - it'll be there
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs
Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care
improves
Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+
including the folks who lost their jobs at Lehman Brothers
and every other company that is cutting back. And of course,
for those serving in our Armed Forces.
If we're going to re-distribute wealth let's
really do it...instead of trickling out a puny $1000.00 (
'vote buy' ) economic incentive that is being
proposed by one of our candidates for President.
If we're going to do an $85 billion bailout,
let's bail out every adult U S Citizen 18+!
As for AIG - liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and
clean it up.
Here's my rationale. We deserve it and AIG
doesn't.
Sure it's a crazy idea that can 'never work.'
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the
$85 Billion We Deserve It Dividend more than I do the geniuses at AIG
or in Washington DC
And remember, The Birk plan only really costs $59.5
Billion because $25.5 Billion is returned instantly in taxes
to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards,
9-27-2008 @ 9:56AM
Barry_Summerlin said...
Mike, check your math before you spam your colleagues and family members with your genius plan. You're off by a factor of 1,000 -- you'd be handing out $425 to each taxpayer. Before taxes.
9-27-2008 @ 10:07AM
jo said...
Give me abreak this bailout sounds like a real STUPIDVIZOR AT WORK BORROW MONEY FROM CHINA? AND GIVE IRAQ 79 BILLION A MONTH SOMETHING SMELLS FISHY
9-27-2008 @ 10:38AM
rob said...
question for the day...........
whats the difference between the goverment officials that oversee our interests and the thieves(CEO's) that have help wipe out life times of savings and retirements?The CEO's take theres in a lump sum,the other slobs are slow bleeders.
9-27-2008 @ 10:41AM
nick said...
We got to this position because of greed and people on Wall Street not knowing what they are doing. You got brokers who don't have a clue about the stocks they are telling folks to buy. They don't do their research before they have their customers put money in a stock. The next problem is the talking heads on TV. like CRAMMER, the talking heads on CNBC and these nuts they have on. People take what they say and buy and sell on it. These folks are making millions on the backs of the folks who really think they know what their saying. They get the folks to sell, then they go in and buy low, run the stock up and then sell. What they don't tell the folks that they all make six and seven figure paychecks and are pushing what the CEO of GE is telling them. Then we get to a CEO who can make millions for getting fired after running a company into the ground, like FRANKLIN RAINES at FANNIE MAE, ex CEO of Merrill Lynch who made millions before they had to be bought out. And the one that just happen at the sixth largest bank to go under, this sucker was their 18 days and he is going to walk away with 13 million dollars. What we need to go back to where CD's and money markets pay about 5 or 7 per cent and FDIC insured. Most folks could live with that instead of being taken for suckers by Wall Street.
9-27-2008 @ 10:48AM
KIN said...
AMEN TO THAT BROTHER.. YOU ARE RIGHT ON... "People no longer believe our leaders have our best interests at heart." ENOUGH SAID !!!!
9-27-2008 @ 10:48AM
Victor said...
The Federal Government should avoid helping stressed financial institutions.
The state where a financial institution(FI) is incorperated should be partly responsible for missdeeds of FIs because they sanction them.
To help with the national cash crunch the Federal Reserve Bank should be forced to provide money
to private loan agents who may start into that business by by simply "opening up shop". The
IRS will keep the agents honest because the paper trail will be clear. Also the private loan agents in this plan must be personally liable for all their business activities.
There are large numbers of people capable of
doing loan processing morally upright: many are being laid off from financial service jobs.
9-27-2008 @ 10:51AM
jo said...
ROB THERE IS NO DIFFERENCE THEY ARE BOTH THIEVES ONLY THE CEO'S ARE BIGGER!
9-27-2008 @ 11:03AM
LAC213 said...
Not only theCEO'sbut how about all the Multi-millionaires. Most of the Senior managing directors from companies like BSC and LEH walked away with millions. . These people, besides getting bonuses in the tens of millions every year, never paid for anything. I worked at one of them years ago and the bonus pool was almost 2 billion dollars for 1 year(there was only about 12000 employees and trust me 95%of the people didn't get ther 1/12000th).That's right 2 BILLION. they nickeled and dimed the little employee giving them $500 to a $1000 and when you asked for a few more dollars they would tell you to take it from one of their co-workers. They had their own dining rooms, had their parking paid for (if they didn't have a limo or a helicopter), everything they did would be some kind of business trip that would be paid for by the company. As a matter of fact I was responsible for a pool of money(over $5 million) that the partners could use to buy flowers, gifts etc without paying taxes on the money) They have houses in the hamptons, florida, new hampshire and apartments in NYC. They are laughing all the way to the bank and our Government wants to bail these people out. Once they dump their toxic securities they will be right back there taking our money and the government will let them. Wake up america. Let these crooks bail themselves out. Yes we might suffer a bit but nobody is bailing out the mom and pop stores that made bad decisions or who fell on hard times. These firms bought these securities to make money and they made a bad investment. I made some bad investments and no one is helping me out. I made a mistake and I must pay the price. What the Government should do is take the 700 billion and let all the people who are about to foreclose refinance their mortgage at a low rate but only if they can afford to pay. The fools that took out a mortgage that they couldn't afford will have to bite the bullet, sell the house, stop leasing luxury cars, and rent an apartment. Down with the bailout. This country is strong enough to wither the storm....It will hurt for a while but at least we will get rid of the greedy executives.
9-27-2008 @ 11:14AM
steve said...
I've had enough ,you teach your kids to be honest,but this is wrong you should teach your kids to be thiefs so they can be prepared for this world.It's stupid to be honest in a dishonest world.If you have any money left everybody buy a gun and take your money back anyway you can.
9-27-2008 @ 11:35AM
nick said...
We have to get rid of these talking heads on TV. Need the stockholders to have more say within a company. Make companys and bank hold a lot more capital in reserve. Make CEO's work for performance vice getting millions for running their company into the ground. Go back to fixed 30 and 15 year mortgages and have 20 per cent down, credit hist, job history. This sub prime mess is the most stupid thing we've done since the way the Savings & Loan were run by people who had no clue on running banks, things are coming around again. If this bail out goes through get someone like Sedman to run it.
9-27-2008 @ 12:09PM
Rick said...
I am disgusted and sickened by the lack of leadership in the country. As part of this bill, Congress should REQUIRE Bush vacate the White House within 10 days of its passage for gross deriliction of duty. Not in Jan....in 10 days. Cox should be right behind him.
9-27-2008 @ 12:44PM
Steve said...
Low interest rates got us to this point.
9-27-2008 @ 1:20PM
PPOND said...
As a former Employee of a Title Company A current Notary Public And Current Title Researcher I lay the blame for much of the problems today at the feet of unscrupulous mortgage brokers in cahoots with bad lenders. When money was cheap we who took the most risk were deluged by brokers in a frenzy to reap the rewards gained in the points they added to the loan to quickly get the work done. I had always made it a point to show the client what they were borrowing as opposed to what they paid back and always recommended they reduce this by paying additional to the principal. Unfortunately many "Brokers" whose job it was to find the best deal for the client found the best deal for themselves. Many of the problems faced by the consumer today are because they were steered into loans that had payments adjusting beyond the clients capability to pay them back. I had always encouraged these clients to refinance to a set 30 yr loan as soon as they could. We know many lenders placed Pre payment penalties on them to discourage this process. Additionally many of the borrowers instead of cleaning themselves up as far as credit was concerned failed to be responsible and felt free to spend as before placing themselves in greater danger. Another challenge the borrowers face is the rising costs of insurance they failed to consider that the greedy insurance companies would double and in some cases triple the rates they charged. I feel this burden on the client has not been given much coverage, As we know the rise in Natural Disasters all over the country of late has forced the Insurance Companies to settle claims something they are loathe to do. They would rather let the client the homeowners go into foreclosure than pay up so the homeowner may repair there home and return to it. Instead Insurers delay, delay, delay and try and screw the Policy holder forcing the client /homeowner to try and support two households the one they live in while trying to repair the one they own. I find the lenders lack of forcing the Insurer to uphold there end of the bargain has facilitated in many of these foreclosure proceedings.
In closing I think it appaling that Barney Fife I mean Frank , Christopher Dodd and all those who failed to provide oversight in the past are now given the lead to find a solution to the Crisis facing the market today. I can assure you if we have to bailout the market by purchasing loans we should purchase the good with the bad therefore giving the tax paying public not only the opportunity to recoup the tax money used to buy them out but the opportunity to actually make money from these mortgage backed securities as we know most people are paying the mortgages they have. For those having trouble we could perhaps try and assist by working with the SBA to refinance them or help them to understand that they bit off more than they can chew. Additionally if any money is made it should be returned to those tax payers whose money is used to rehabilitate the system NOT ONE PENNY SHOULD GO TO ANY SPECIAL INTEREST GROUP OR PET PROJECT ALL MONIES RECIEVED SHOULD BE RETURNED TO THE TAX PAYING PUBLIC IN A FORM OF A TAX REBATE OR REDUCTION IN TAXES. NO MONEY SHOULD GO TO PET PROJECTS SPECIAL INTEREST GROUPS OR GIFTS TO NON TAX PAYING HOLDERS NO ADD ON'S to This Bill Should be allowed it should be strictly enforced as an Assignment of Loan to the public and no holders of ss#'S who do not pay taxes should reap any benefit.
9-27-2008 @ 1:18PM
henry said...
no bail outs for any one.I was watching tv they kept on saying that bank are not lending to other banks any more.business can not get loans.we need 700 billion to get econmey going.After seeing how crooked banks were in there loans.I would not loan money to one of these crook either they do not trust each other and we tax payers are suppose to lend or give them money.they are trying to cause a panic any body voting to do this bail out should be kicked out of office
9-27-2008 @ 2:18PM
John Holt said...
Elect OBAMA and we are setting the fox to watch the hen house
Here is the cause of the economic crisis
http://www.youtube.com/watch?v=H5tZc8oH--o
9-27-2008 @ 3:22PM
joe said...
BOY GEORGE DID NOTHING THATS WHY WE GOT THIS WAY!
9-27-2008 @ 3:42PM
Frank Cellura said...
Definitive Definition.
C.E.O.= Criminal Enterprise Officer
9-27-2008 @ 3:37PM
Estee said...
You seem to indicate wall street started securitization in the 80's! seems it was more like the Government was 1st with GNMA's from HUD!!!!!! in the 70's