I'm tring to remain open to some form of bailout, as the potential consequences of our economic situation are too dire to stifle policy proposals through close-mindedness.
Still, I would like to see if there are other options...
As Congress considers the Administration's bailout initiative, I would like to offer a different proposal, based on the following assumptions:
- The extent of the problem regarding poor investments on Wall Street is currently not quantifiable. The $700bn figure currently being bandied about as the cost of a rescue plan appears to be more a case of illustrative language than actually based on any assessment of true exposure. Therefore, we have to realize that this "comprehensive solution" that is designed to end the piecemeal approach of the last six months may turn out to be a low estimate, and therefore not a definitive solution, but a continuation of that piecemeal approach. The Take-Away: policy makers should prepare for the worst, and hope for the best.
- Contagion from a sizable collapse on Wall Street would have a limited impact on global finance. While no doubt there would initially be considerable pain at a time when many economies are sluggish, outside of the US and UK the impact would be short in duration and quickly recoverable in China, Japan, France, and Germany. The Take-Away: while the value of assets in the US & UK would tumble, several other countries would still be cash-rich and asset rich.
- The real threat to the American economy-the shoal beneath the waters that was revealed on Wednesday-was not the collapse of high-profile firms, or the drop in the markets. It was the seizure in the banking system itself, a lack of trust and transparency, which produced an extreme flight to safety and the hoarding of cash. If not dealt with, this would have drastically reduced lending to Main Street consumers and businesses, and eventually would have interrupted payment systems. The Take-Away: the real problem is not a collapse on Wall Street itself, but the damage that would inflict on the economy of Main Street.
- The third rail-the difference between a major problem and an unrecoverable problem-is the status of the dollar. The US does not have the internal savings rate to sustain its own debt, and foreign banks and governments cannot be counted on to support it indefinitely. A huge outlay for a quickly put together rescue plan may spook foreign investors away from the dollar; even if they were to continue to support it, likely inflationary pressures a few years after the crisis would also damage the dollar. (Moreover, to combat inflation would require high interest rates, which would raise the cost of borrowing as well as the interest payments on pre-existing loans that have free-floating rates. That would seem to put us in a similar situation where we are now, in terms of the viability of obtaining credit.) The Take-Away: the dollar must be protected at all costs, and a large-scale rescue plan threatens the dollar.
What emerges is a very clear choice: given limited resources imposed by a large national debt that may be unsustainable, do we want to save Wall Street, or do we want to save Main Street? To put it another way, do we want to save the Anglo-Saxon laissez-faire model and its power structure, or do we want to save the underlying American economy?
My solution is simple: let Wall Street "own their failure", and save Main Street through a national bank. This government-run bank would have a presence in all areas of finance, from money markets and investment banking, to consumer and business lending on Main Street. It would certainly not replace private sector banks, nor would it dominate any one sector of finance, but it would be government-run, government-owned, and perhaps most importantly, permanent. The National Bank would anchor the entire system, providing security, restoring trust, maintaining an open pipeline of consumer and business lending, and would set the norms for industry behavior. In fact, as the poster child for transparency and regulatory diligence, it would force private sector banks to prove their own trustworthiness in order to compete.
In this scenario, Wall Street would be allowed to fail, and the market would find equilibrium. Housing mortgages and student loans would be renegotiated (between the banks that hold them, and consumers), asset values would be re-assessed, and losses absorbed. The National Bank would ensure the continuance of economic activity as other institutions take the impact and recover. Relatively modest government expenditures would be focused on funneling credit, protecting FDIC, and shoring up pension plans. With the Main Street economy thus shielded, foreign investment would surge in to take advantage of lower asset prices among industry (i.e., Detroit and the airlines may end up being foreign-owned), this investment would further stabilize the economy, and lead to growth that itself would lead to a recapitalization of Wall Street.
I wouldn’t be surprised if a national bank actually became the de facto solution, if Congress does not pass a rescue plan, or if the $700bn cost turns out to be woefully underestimated. Indeed, with the nationalization of Fannie and Freddie, and the quasi-nationalization of AIG, you already have some of the pieces in place. If WAMU and especially Bank of America were to fail and be taken over by the government, you would essentially have an infrastructure for a national bank with a very broad and deep reach, from the exchange floor to the ATM at your local branch...it would only need to be reconstituted as one coherent entity.