What appears below is an article by James Galbraith, a named chair economics
professor at the University of Texas, and a worthy son of a great father. It appeared
originally in the Washington Post, but has been recopied to several hundred sites
on the Web, so I hope that I don't get into trouble by giving it again here.
NB: Those who have read my Article on "The Bailout and the Liberal Response" may
suspect that I stole my ideas from Galbraith<g>. I swear on a stack of Bibles; Not So!
A Bailout We Don't Need
By James K. Galbraith
Thursday, September 25, 2008; A19
Now that all five big investment banks -- Bear Stearns, Merrill Lynch,
Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared
or morphed into regular banks, a question arises.
Is this bailout still necessary?
The point of the bailout is to buy assets that are illiquid but not
worthless. But regular banks hold assets like that all the time.
They're called "loans."
With banks, runs occur only when depositors panic, because they fear
the loan book is bad. Deposit insurance takes care of that. So why not
eliminate the pointless $100,000 cap on federal deposit insurance and
go take inventory? If a bank is solvent, money market funds would flow
in, eliminating the need to insure those separately. If it isn't, the
FDIC has the bridge bank facility to take care of that.
Next, put half a trillion dollars into the Federal Deposit Insurance
Corp. fund -- a cosmetic gesture -- and as much money into that agency
and the FBI as is needed for examiners, auditors and investigators.
Keep $200 billion or more in reserve, so the Treasury can recapitalize
banks by buying preferred shares if necessary -- as Warren Buffett did
this week with Goldman Sachs. Review the situation in three months,
when Congress comes back. Hedge funds should be left on their own. You
can't save everyone, and those investors aren't poor.
With this solution, the systemic financial threat should go away. Does
that mean the economy would quickly recover? No. Sadly, it does not.
Two vast economic problems will confront the next president
immediately. First, the underlying housing crisis: There are too many
houses out there, too many vacant or unsold, too many homeowners
underwater. Credit will not start to flow, as some suggest, simply
because the crisis is contained. There have to be borrowers, and there
has to be collateral. There won't be enough.
In Texas, recovery from the 1980s oil bust took seven years and the
pull of strong national economic growth. The present slump is national,
and it can't be cured that way. But it could be resolved in three
years, rather than 10, by a new Home Owners Loan Corp., which would
rewrite mortgages, manage rental conversions and decide when vacant,
degraded properties should be demolished. Set it up like a draft board
in each community, under federal guidelines, and get to work.
The second great crisis is in state and local government. Just Tuesday,
New York Mayor Michael Bloomberg announced $1.5 billion in public
spending cuts. The scenario is playing out everywhere: Schools, fire
departments, police stations, parks, libraries and water projects are
getting the ax, while essential maintenance gets deferred and important
capital projects don't get built. This is pernicious when unemployment
is rising and when we have all the real resources we need to preserve
services and expand public investment. It's also unnecessary.
What to do? Reenact Richard Nixon's great idea: federal revenue
sharing. States and localities should get the funds to plug their
revenue gaps and maintain real public spending, per capita, for the
next three to five years. Also, enact the National Infrastructure Bank,
making bond revenue available in a revolving fund for capital
improvements. There is work to do. There are people to do it. Bring
them together. What could be easier or more sensible?