Any solution should focus on aiding those at risk of losing their homes. It should address the need to renegotiate the costly mortgages, and even to reduce the principal to the present market rate. Mortgages should be provided at a fixed rate, e.g., 6%, with no points or added fees. To make this more palatable to the financial institutions, the government could reimburse the appropriate financial institution for the difference in principal between the market value of the property when the loan was first negotiated to the present market value, which becomes the principal of the new mortgage. In the case of subprime loans, it is possible that where the property value has fallen, the present owner may be able to afford the reduced mortgage. Addressing individual mortgages identifies specific assets and costs. A temporary organization would have to be established to set the rules that would apply and create the network for the homeowners who have been victimized. This should be confined to primary residences to reduce the likelihood that those who were speculating on the housing market could now profit from the crisis. This should prevent foreclosures, stabilize the housing market, provide financial institutions with additional working capital, and be less costly than the presently proposed bailout. It allows decisions to be made in a non-panic mode, as opposed to the present crisis mode, which is guaranteed to result in flawed decisions.

As far as the financial institutions at risk, if they cannot survive under these conditions, they should be allowed to fail, because other existing institutions would step in when it becomes apparent that these “toxic assets” can be detoxified to some reasonable extent. The financial institutions that encouraged and promoted these risky investments, and the executives, brokers and investors that reaped their benefits, accrued significant wealth as a result. They had their day, now it’s time to pay.

Another risky path is letting private equity firms “invest” in banks. Is the goal here to allow more profiteering on Wall Street and set the stage for the next financial crisis? It appears that there is too much creative thinking going on here, and not enough consideration to the “tried and true.” Now is the time for caution, not risky “quick fixes.”

It is important to re-regulate financial institutions and place constraints on their lending practices, on interest rates which have become usurious in recent years, and on the practice of encouraging borrowing via credit cards to people they know cannot afford them, and then charging them higher interest rates so that they can never pay off their debts. That used to be considered “loansharking.” The present crisis makes it clear that “laissez-faire” or let the market decide, is license for those in power to pursue profits by any means. Where is government “of the people, by the people, for the people?” Today it has become government “of the rich, by the rich, for the rich.” Will Congress step up to change that, or will it capitulate to the moneyed interests?

It is a bailout: the shareholders lose nothing. Unlike Bear Stearns, Fannie, and Freddie, whose stocks were hammered, the shareholders actually benefit by the removal of bad loans from their companies’ balance sheet. That’s why banks stocks rallied hard after this came out, e.g. Citigroup went from $14 to $20 in two days.

No one thought the Russian peasants would revolt but when they finally did the result was a one of the most brutal governments in history.

The economic consequences of this situation will be bad – probably a decade-long recession; millions of Boomers too poor to retire so they stay in the workforce sucking up jobs in an economy that will already have high unemployment, not to mention a frightened, excessively risk-averse financial industry making it impossible to finance startups and business expansion.

But what’s worse is the risk of violence, riots, and repression. This bailout puts the government in so much hock that we can kiss the chances of any national health insurance goodbye. There will also have to be huge cuts in other domestic programs. And all this at a time when millions will be losing their jobs. There will be lots of civil disorder and the government will use this as an excuse to reduce our civil liberties even more. That will radicalize even more people and things will cascade.

Your right it is and this how revolutions are started.
Although I think Americans are to complacent and wont take to the streets. I should know I as guilty as the next person.

If enough people start to feel that the government is not working, that the whole game is falling apart you will get unrest. This happened the late 1890’s and early 1900’s.

In the 30’s there were labor riots.

People are emotional it seems to me to be a natural reaction.

We have lost our country if you ask me. We no longer control it, it is controlled by Wall Street, Big Oil, and other large corporate entities.

I don’t trust any of these people, they have do something however they had been warned by economist and members of the G7. They did not head the warnings so now we might end up some morning and think we are in Argentina.

Second: James Galbraith said, if I understood correctly, that the deficit-increasing rescue transactions would NOT preclude candidates’ plans for spending. Somehow, health care and infrastructure repair, as Obama example, would still be possible, since dollars now allocated to bad debt would be freed up, like energy, to fund social programs. How does that work? Sounded like Robert Shapiro, on Marketplace today,
said the opposite; that the 700-bill plan would wipe out funds for such spending.

Can anyone explain? Important point for candidates to communicate.

Write your congressman and senators; ask them to look at the alternatives.

I wasn’t quite clear how the Big Picture plan avoided the moral hazard problem, since esentially it allows irresponsible homeowners who took out insane mortgages to not lose their homes or shirts. There’s an old saying: “Being stupid SHOULD hurt!” But the practical problem is that if we put the stupid people out on the street it lowers the property values of those of us who made rational, responsible choices.

I agree that we should consider alternatives to this plan, and there are many to choose from. I wrote to my congresswoman and my senators advising them to consider alternatives, and to not get stampeded like they did on the Iraq War, into a big expensive disaster. I provided a list of questions to consider before adopting any plan.

We are looking into the economic abyss right now, and it’s a near certainty that for the next decade we will all be poorer than in the last one, and that the chance of Obama or anyone implementing any of the Big Plans such as national health insurance have pretty much been erased because the US will just be too poor and in hock.

With any luck the US will develop some sort of genteel third-world charm of decaying poverty, sort of like Cuba today, but hopefully without the political prisons. And it will neatly solve the Mexican immigration problem since there will be few jobs available here and Americans will finally be willing to work for Mexican-immigrant wages. The Chinese have the most to lose, since their holding of US paper will become nearly worthless, and the collapse of their biggest export market will make it impossible to maintain the feverish economic growth that has kept the its historically restive population from staging yet another peasants’ revolt.

We are about to enter a truly memorable period of history. Hang onto your hats.

The Big Picture has a modest proposal. It seems better than the Paulson bailout. Essentially it gives govt loans to some homeowners, propping up some of the toxic waste while the banks unwind.

Write your congressman and senators; ask them to look at the alternatives.

What’s arbitrage got to do with it? A currency arbitrage opportunity exists when there is a disparity in the price of a currency in different markets. That’s not what we’re talking about here.

“Yet despite this the yen has either maintained or gained strength compared to many of their trading partners”

But not against the dollar. Japan’s budget deficit as a percent of GDP has continued to grow from the mid 1990’s to 2000. During that period, the Yen weakened against the dollar. Know what else was happening in that period? We went from budget deficits to a budget surplus.

Many economists think that the reason we’re still in positive territory, GDP-wise, is because of the strength of US exports, due to the weak dollar. I work for a company that exports about 2/3’s of what we make so I certainly owe my job to exports.

Furthermore, a weak dollar should help correct our trade imbalance, and make imported oil more expensive, which will reduce demand and encourage alternative energy development.

Also, if we have a recession, this will blunt demand, which will mitigate against inflation even if the dollar does weaken.

The current 10-year bond rates do not suggest that most investors are anticipating extreme inflation.

What would you cite as a modern example of a society that illustrates the principles you espouse?

Nope, not speculative at all. The only way this bailout can be done without hammering the dollar is by raising taxes, and no one is going to do that.

In the 1990’s Japan issued lots and lots of bonds to pay for their incredibly expensive and unsuccessful attempts to stimulate their way out of their recession and the BOJ lowered rates to 0. Total Japanese government debt rose to 130% of GDP. Yet despite this the yen has either maintained or gained strength compared to many of their trading partners. When I was my company’s liasson to our Japanese partner in the ’80’s it took 240 yen to buy a dollar and today it takes about 114. Against the British pound it’s has maintained rough parity since then (with ups and down in between), etc.

The value of the dollar depends not only on what’s going on here, but also what’s going on eleswhere. If the ECB lowers rates that would drive the dollar up; if the whole world becomes unstable, there might be a flight to dollars. If predicting currency swings were simple we’d all be counting our millions from currency arbitrage.

House prices have doubled over the past decade.

http://img253.imageshack.us/img253/4562/nytshillergraphsept07db0.jpg

While wages have remained flat.

http://www.centrists.org/images/charts_and_graphs/post4_2004_content/eci_wage_real.gif

Low wages plus high house prices are unsustainable and it is foolish to waste taxpayer money trying to continue it.

House prices have to drop (few bailouts/depression), wages and all other prices have to rise to match housing (many bailouts/hyperinflation), or we must limp along for a decade or two until the market comes back into balance.

Prevention was the best medicine. It’s too late for that now and continuing to kick the can down the road will just make things worse in the end.

P.S. I am a renter and a saver so guess which solution I want.

“The average American with a credit file is responsible for $16,635 in debt, excluding mortages, according to Experian. (Source: U.S. News and World Report, “The End of Credit Card Consumerism,” August 2008)”

The average american with a 401k has only slightly more than $120,000 today, and that averages in the top five percent of wage earners, clearly skewing the total for the lower 95 percent.

The only way americans will be secure in retirement is to ensure social security is solvent and perhaps to see the return of Unions and a sense of corporate responsiblity for workers (ie.- supplemental pensions, not necessarily huge ones). Nationalized healthcare is also desperately needed if we don’t want to see more people dying under highway bridges.

REAL adjusted unemployment(not the skewed GAO statistic) is now well over ten percent and not likely to improve any time soon.

THE MYTH THAT THE WEALTHY ARE RESPONSIBLE FOR MOST JOB CREATION:

The Trickle Down theory doesn’t work because the wealthy don’t put even half of their money into companies that create employment… they bet as much against the market as they do on it, they invest in exotic schemes and to a large degree they invest outside the U.S.

When more wealth goes into the hands of many, that money really does move more effectively through the economy creating real jobs. Millions of people spending money on all the variety of goods and services that they need spurs far more economic activity and spreads wealth far more effectively than one person with hundreds of millions investing less than half of it on real companies that actually create jobs.

Every dollar earned on this planet has a sort of curse attached to it in the form of what it takes to create that dollar of wealth… limited world resources are used, pollution is created, the environment is affected, etc. So what justifies one person hoarding so much more when every dollar earned costs the entire legacy of the world something in the way of a curse?
This is why the wealthy should pay a graduated increase in terms of the wealth they amass… no one person deserves to use up so much in terms of resource wealth and the cost to the environment without paying more proportionally for the good of the rest, especially when that one person has cost the rest in terms of legacy.

The cost in planetary legacy and the fact that wealth creation works more effectively when spread out among many is why so much of our system needs a messaive reevaluation and drastic changes.

Let these huge corporate entities fail according to the laws of Free Enterprise, and then let democracy take its natural course to heal.

Nope, not speculative at all. The only way this bailout can be done without hammering the dollar is by raising taxes, and no one is going to do that.

The other alternatives – issuing debt or printing money – will pressure the dollar, interest rate parity be damned.

The other thing that few people are talking about is that if they fund this bailout with debt, it’s entirely possible that the U.S. could lose its AAA debt rating. The implications of that are truly scary.

I meant 3.5%.