Bailout

Naysayer Report: Surveying the Saviors

By Admin

Anyone who is anyone in finance has their own version of what steps the government should take to rescue the financial markets and the economy. A quick survey of the most vocal among them:

Philippe Lacoude (president of consulting firm Algokian) and Veronique de Rugy (Mercatus Center economist)

[Take the $700 billion Congress plans to give] Wall Street and sending checks worth $3,600 to the 191 million U.S. taxpayers. Such checks would then have to be deposited into some type of retirement account or be subject to the IRS’s premature IRA distribution rules.

The most risk-averse people would invest this windfall into relatively safe money market funds, thereby preventing the credit crunch predicted by the pundits. Some would buy instruments such as mutual funds, which would sustain the market. Savvier investors, or at least those with a high risk threshold, would profit from the low prices on Wall Street to purchase stock in distressed banks.

Less than 30 days from the presidential election, such a measure would have proven popular with an electorate that does not trust the very politicians and technocrats who ignored the warning signs of a crisis and contradicted themselves constantly. And it would have prevented the socializing of a big chunk of Wall Street, a risky and unprecendented intervention into markets whose full effects won’t be clear for many years to come.

Eliminate mark-to-market

One bit of good news is that the bailout bill reminds the SEC that it has the authority to suspend the Financial Accounting Standard 157, or “mark-to-market,” which requires that companies value the assets on their balance sheets based on the latest market indicators of the price those assets could immediately be sold for. It’s a sensible rule in prosperous times, but it puts otherwise solvent banks in a difficult position when they fail and sell their assets at low prices. Under mark-to-market, declining housing prices don’t just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them becomes worth much less. Congress should have blocked them from going into effect in their stricter form last November and should have removed them formally in the bill.

Extend capital gains tax cut

The federal government could also have fostered savings and investment in the stock market by extending the capital gains and dividend tax cut past 2010 (when it is due to expire under current law). This would raise the rate of return of financial assets at little cost to the Treasury and give a strong incentive to taxpayers to stay in or go back into the market. Congress could also lift all Roth IRA contribution and eligibility limits for the rest of 2008. Because Roth IRA contributions are not tax deductible, this measure has no immediate cost to the Treasury, but it would have likely pumped billions of dollars into a tight market.
Reason Online

Socialize the banks
Invest directly in US banks.

Buy the toxic debt
Use TARP funds principally to purchase illiquid debt securities, mainly mortgage securities.

Jim Cramer
Secret government loan to a handful of “too big to fail” banks in return for their returning to the consumer lending business.

Jim Rogers
Teach investment bankers to ride tractors.

Full post as published by Bailout Report on October 10, 2008 (boomark / email).