Hank Paulson has worked his whole life in a business culture and as he rose to the top of Goldman Sachs, when he said “jump”, his minions said “how high?”. His first mistake in the rescue package was putting out a three page “deal memo” that reflected the command and control culture from whence he came. And then he ran into a thing called democracy.
I think we need to face the fact that the anger on Main Street is a full scale revolt against Bush and Paulson’s notion that the taxpayer should bear the burden of the long term misjudgement and incompetence of the nation’s political and financial leaders.
As I have said before, there is ample capital in the world. What is missing is trust. When a bank like Wachovia gets sold, only to write down in one day $30 billion of assets it was carrying on its balance sheet the day before, you can see why no bank wants to lend to another bank. In the absence of a $700 billion rescue package, which I’m still not confident will pass, the Treasury and the Fed could do a few things that might get us through the confidence crisis.
- Fannie and Freddie should aggressively go into the market buying mortgages, TODAY.
- The FDIC should raise the guarantee on bank deposits to $250,000 per account, TODAY.
- The Fed should suspend for six months the mark to market accounting rule on mortgage securities or create some other rule that would allow banks to keep frozen mortgage paper segregated on their balance sheets.
- FDIC should force every bank to deliver an audited statement of all of their holdings including Credit Default Swaps withing 30 days. Transparency is the soul of confidence.
Ultimately there are many banks that are just plain insolvent and we need to know which ones they are. Once the “dead men walking” are disposed of, we can begin the task of rebuilding this country. But we cannot fool ourselves into thinking that solving the banking crisis will be the key. On the day of the next President’s Inauguration, my guess is that unemployment will be close to 8% and the rate of foreclosure and bankruptcy will have accelerated. Like Roosevelt, the new President will have to create a large “Rebuild America” plan in which the government helps seed both the Information Technology (IT) and Energy Technology (ET) projects that will form the base of America’s return to an economy of production and saving. The supply side economists who pushed the economy of consumption and borrowing since the election of Ronald Reagan, will still fight in the rear guards of AEI and the Heritage Foundation, but they will be irrelevant to the Next America.