What Is to be done ?

Robert Waldmann

OK what now ? Unless someone has just submitted a post, AngryBear doesn’t have a post on what to do now that the House Republicans (and some Democrats) have voted down the Paulson-Dodd-Frank bailout bill.

The contingent consensus of the Left Blogosphere seems to have been to go for the Swedish solution if the Paulson solution is rejected — that is nationalize banks with inadequate capital. I think this is still politically impossible. Even if the Democrats go alone and Bush is afraid to veto, the blue dogs will be blue dogs.

I think 2 complementary and more moderate proposals might pass over Republican objections and save the financial system. They are, of course, exactly what I have already proposed here and here.

First preferred shares. Economists of all ideologies agree that what the banks need to do now is increase their equity by selling shares. No one much wants to buy so if they sold a lot the shares would be very cheap. I think a bill which allows banks to sell a lot of preferred shares to the Treasury and makes sure that the Treasury will lose money only if the bank goes bankrupt might make enough sense to people who aren’t even me, that it would be a political winner. See the old post for details.

I add one clause — a contingent surtax on the rich. Withold an extra 10% of income over $1,000,000 and, each year, return the part that wasn’t needed to cover losses in the Buffet X 100 plan (plus the chained 3 month t-bill interest rate). This is very much in the interests of the rich as they will get their money back and the financial system will be saved. The under a million crowd will be protected.

Also squabbling over exactly what to do with the profits that the Treasury will make might convince people that there will be profits (I think there will be if the purchase is at share prices as of today September 30).

The other is Toxic Sludge Inc. This is a mandatory program in which the Treasury contributes 0 dollars (sky divers holding hands and thinking they are pulling each other up in Drum’s words but it might help). The proposal would be to require all owners of mortgage based assets to contribute those assets to the new entity in exchange for shares proportional to the current market value of the assets.

The point is that it is easier to price the whole pool of toxic waste than each droplet so the shares of toxic waste Inc will be traded and, I hope, for a reasonable price. Also Toxic Sludge Inc will be able to reassemble whole mortgages and authorize mortgage initiators to re-negotiate if it is more profitable than foreclosure.

I think these ideas might be popular enough (both have guarantees that they cost most people nothing and don’t add to the deficit long term) that the Democrats can afford politically to pass them over Republican objections.