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    On “The Bailout”, Part 4: What I think should be done short-term

    I have 5 points. It is not legislation, but it is the nugget of what the legislation should be.

    1) FDIC Insurance change

    – Increase deposit amount covered by FDIC insurance $300k (this would have been more interesting if I had blogged this when I wrote it down before everybody was suggesting it).

    [Update: Ireland is doing something similar…but covering all deposits. That is an excellent signal!]

    – Add $40billion to the FDIC current fund.

    These steps should signal soundness for deposits and prevents runs on deposits.

    2) Lower capital requirements for banks

    This is really the Kling idea. I don’t hear anybody else mentioning it. With lower capital requirements, banks will immediately be able to lend more (unless they are in really bad shape, in which case they should be sold or broken up).

    This achieves the goal of increase the ability of the banks to loan and it cost nothing to taxpayers.

    The lower requirements could be kept for a few years and slowly phased back to the old levels.

    3) Provided Secured Loans to Banks

    -make loans to banks secured by Bank assets ($200 billion, should work)

    -The rate should be fair; I would be okay with a 6 month interest free period

    -require the banks to cease dividend payments (both common stock and preferred stock) and stock buybacks until the loans are paid back

    -require banks to issue for sale on the open market additional common stock in an amount of up to 50% of the secured loan

    This is sort of what Chile did during their crisis.

    [Update]. I would also be okay mixing in (or even maybe substituting) the Secured Loans with the purchase of warrants by the USGOV (see my comments below)

    update: Soros has plan out there (I can’t find the link). The idea I liked was using Bank examiners to determine what the capitalization level gap is for a Bank.

    4) NSF Foundation Project

    An amount of money (less then $1 Billion) should be allocated to and used by the NSF for the purpose of grants and prizes for the development of means/methods of valuing related complex securities, all of which are to be placed in the public domain. This is to deal with the problem of not being able to value these securities…without the US taxpayer buying them.

    5) Civil Litigation Fund

    An amount of money (less then $1 Billion) should be allocated to and used by the Justice department for the purpose of investigations and civil litigation into fraud and fiduciary misconduct by Bad Actors. The guilty have it coming and this will give solace to the citizenry.


    4 Responses

    1. This article is interesting too:


      Instead of secured loans, it suggests investment into the banks with warrants (the right to buy stock at a certain price in the future) to get them the cash.

      I am ok with this approach too with the stipulation that USGOV never actually buys the stock, but would eventually sell the warrants on the open market (I don’t want USGOV taking equity stakes in banks if it doesn’t have to). For banks that fail, the warrants won’t be worth anything.

    2. I just realized the above article link is from Nobel Prize winner Phelps a favorite of mine.

      Here another post on his work:


    3. Sounds good. I linked to another good plan.


      Watching the pro-bailout politicians and talking heads is interesting. Vague insults, an insistence now that details don’t matter… utter intellectual bankruptcy.

    4. While you were commenting here, I was at your site looking over that plan!

      I left my critique there.

      I don’t really like that plan either (is that the Senate plan). It seems to have several things unrelated to the actual problem that are trying to be slipped in. Plus, the USGOV still ends up taking the risk since the plan is effect by the fact that we can’t value the complex mortgage relate securities with any reasonable accuracy.

      One more thing on the Phelps’ warrants idea. The one minus is that warrants become valueless if the company folds, where a secured load should get something back in the way of assets to sell of.

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