What Might Work: Do A Bank Holiday

[Better Believe It]

Bridge Loan to Nowhere
By Thomas Ferguson & Robert Johnson
The Nation
September 22, 2008



In America's money-driven political system, leaders of both parties love to pretend that the sound of money talking is the voice of the people. Both presidential candidates and Democratic Congressional leaders are mostly nodding, with the Democrats adding trademarked noises about balancing off gifts to Wall Street with mortgage relief, another small economic stimulus program and perhaps some curbs on executive pay. Meantime, save for a handful of splendid exceptions, notably Gretchen Morgenstern of the New York Times, American newspapers just keep giving their readers more reasons to keep deserting them.

What Might Work

You could simply take a leaf from the New Deal and do a bank holiday. That is, send bank examiners into all the institutions-- investment houses, and insurance companies and the other major players, as well as banks--to assess them. Insolvent ones are simply closed; everyone knows then that those that survive are solvent. Economic life restarts. The total cost is minimal. In the nineties, under Greenspan, the Fed ran away from its duty to oversee primary dealers in government securities. Voting it sufficient authority to do the job not just on Wall Street and the banks, but in any part of the system not covered by effective regulators would be far less expensive than the Men in Black's scheme.


Congressional Options

It is fine for Democrats to hold out for mortgage relief and for another stimulus package. The best way to do the first, probably, is by reviving something like the Home Owners Loan Corporation that worked so well in the New Deal. That bought mortgages from people who were in danger of losing their houses and converted them into obligations that they could afford to repay. This sort of bailout has the wonderful property of directing public money to the public, rather than Wall Street. But it would still bail out Wall Street, since reviving housing and stopping mortgage defaults feeds directly through to mortgage bonds values and derivatives based on them.

The situation is dire, but it is not hopeless. A flurry of discussions with other central banks and governments may soon produce claims that international agreements hem in legislators here. Congress has a straightforward counter to this and any manipulative threats of economic collapse: Turn the gun around. Move every bit as speedily as Paulson and Bernanke demand, but pass a bill that anyone can see protects the public far better than the Men in Black's proposal. If President Bush--remember him?--refuses to sign it, make it obvious to voters who's really crashing the system for private gain. All of the House and a third of the Senate are up for re-election. Enough votes can probably be found from among Republicans who would like to survive a Democratic landslide to pass something far better than the Men in Black's bridge loan to nowhere.

Please read the entire article at:

http://www.thenation.com/doc/20081006/ferguson_johnson