September 30, 2008

The Day After 9/29/08 - And a Simpler, Better Plan

Jacflash will have seen it already, but this is definitely a fun way to look at yesterday (at least for fans of Fight Club).

And Blodgett/Hussman's solution to this does appear a better way to go:

A better approach would be for the government to provide capital directly, in the form of a "super-bond," in an amount no greater than the debt to bondholders. The "super-bond" would be subordinate to customer liabilities, so it could be counted as capital for the purpose of capital requirements, and would be seen by customers as a legitimate cushion of protection.

However, in the event of bankruptcy, it would have a senior claim in front of both stockholders and even senior bondholders. Do that, and you've actually got a mechanism to protect the financial system while at the same time protecting customers and taxpayers. Ideally, the super-bond accrues a relatively high rate of interest so that financials have an incentive to shift to private financing as soon as possible, but you would also defer the interest until the bank meets a minimal level of profitability to make sure that the financing doesn't strain the institution's liquidity.

And as far as why the bill failed yesterday, Bush, Boehner, and for that matter McCain, couldn't round up more than 1/3 of the Republicans in the House to vote for the thing. As for what that says about their leadership of their party, you be the judge.

Posted by armand at September 30, 2008 09:26 AM | TrackBack | Posted to Economics | Economics


Comments

So it's Wed. afternoon and the Senate will soon be voting on a bailout/rescue plan. Should we want to see this thing pass (apparently it will - though that's what we expected on Monday too)? My uninformed view on Monday was it was a lousy bill, but one that probably needed to be passed. Do you think that still holds today? Or did Monday's defeat open up room for a better bill? And is what's pending in the Senate really better in any notable way? Just throwing it out there in case anyone feels like commenting on these matters today.

Posted by: Armand at October 1, 2008 04:01 PM | PERMALINK

It still sucks. I still think it should be passed. I increasingly think the effect will be to punt the problem down the road until next spring or so, at which point with luck President Obama and his very good economic advisers can work with Congress to do something more robust.

Posted by: jacflash at October 2, 2008 09:08 AM | PERMALINK
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