Back in the saddle

Wow, it's been over a week since I last posted. This is mainly due to laptop issues... and before you start in with the "Macs are better" mockery, it was a hard drive failure, and last I checked, Apple hardware fails on occasion, too.

Anyway, the big story of the day is BAILOUT BAILOUT BAILOUT.

Before I attempt (and believe me, it will be an attempt, at best) to get into the nitty-gritty of the current financial situation of the United States, here is a graph that seems to accurately depict public perception of all bailout talk from Washington.



Whether or not this is fair or correct, let's remember that fairness does not factor into the realm of public opinion. Just ask anyone who works in public relations.

Now, the best way to get a handle on what the now-rejected Bailout Rescue Bill 2008 was is to read all 100+ pages of it. I admit I haven't. What I have read are others' criticisms of said bill.

Here is one, from a guy who mostly writes about sports and has a non-existent economic background.

Just One Bailout Thought: As Congress continues to debate whether they are going to hand over $700 billion of your money to the wealthy who screwed up Wall Street and the banking industry, you will be relieved to learn that top executives of the bailed-out firms temporarily will be limited to a strict $500,000 a year in tax-subsidized income. Surely you receive $500,000 a year in tax-subsidized income, don't you? Anyway, supposing we assume the bailout is required, here is what bothers me about the plan so far: Taxpayers don't get stock, what they get is warrants that can be exchanged for stock, and nonvoting stock to boot. This means that once media attention switches to the next crisis that everyone will claim in retrospect to have seen coming, the Wall Street rich can quietly lobby to have the warrants never called, thus keeping the entire bag of gold for themselves. Even if the warrants are called, taxpayers get no voting positions -- meaning the boards of directors of the bailed-out firms can do anything they damn please with taxpayers' money.

A week ago, Warren Buffett rescued Goldman Sachs by injecting $5 billion in capital. Did Buffett bargain for warrants that can be exchanged at an unknown later date for nonvoting shares? No: He is not a fool. Buffett gave Goldman Sachs $5 billion in return for senior preferred stock, the kind that votes and also is more valuable than ordinary shares. That is to say, he used his money to buy something. Goldman can now employ the cash to fix its liquidity problems. The United States Congress and the White House should use the public's $700 billion to buy something, namely senior preferred shares. Why are Congress and George W. Bush not simply following the road map laid out on this problem by the smartest investor of our era? Either Congress and the president are a bunch of blithering fools -- or what they actually want is to insure the public's money is never seen by the public again.

An interesting take on one aspect of the bill. People with more economic education than I have said he got it right, though.

And from Dave Ramsey, who does have a fairly solid economic background:

Years of bad decisions and stupid mistakes have created an
economic nightmare in this country, but $700 billion in new
debt is not the answer. As a tax-paying American citizen, I
will not support any congressperson who votes to implement
such a policy.

Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying
FHA-type insurance. Government-insured and backed loans would
have an instant market all over the world, creating immediate
and needed liquidity.

B. In order for a company to accept the government-backed
insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent
to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs
into the balance. This brings homeowners current and allows them
a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing
or the sale of the property to pay off the bad loan. In the event
of foreclosure or short sale, the borrower will not be held liable
for any deficit balance. FHA does this now, and that encourages
mortgage companies to go the extra mile while working with the
borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs
and executive team members as long as the company holds these
government-insured bonds/mortgages. This keeps underperforming
executives from being paid whenthey don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction
of the current proposal.


II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on
only subprime Tier III bonds/mortgages. This keeps companies from
being forced to artificially mark down bonds/mortgages below the
value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate
stabilizing effect on failing and ailing banks—and it costs the
taxpayer nothing.


III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will
flood the real estate and stock market in search of tax-free
profits, creating tremendous— and immediate—liquidity in the
markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because
many will say it is helping the rich. The truth is the rich will
benefit, but it will be their money that stimulates the economy.
This will enable all Americans to have more stable jobs and
retirement investments that go up instead of down. This is not a
time for envy, and it’s not a time for politics. It’s time for all
of us, as Americans, to stand up, speak out, and fix this mess.

This plan seems to be favored by the one Congress drafted two days ago, if the internets are to be believed. :)

The point is that there are a lot of good ideas floating around the country. There's no need for Congress to hurriedly put together something, anything, to placate the American people. Let's do this right the first time.

Now, from my point of view, I'd prefer we didn't grab an arbitrary sum of money from the taxpayers and throw it at the problem. Obviously that's a simplistic view of the proposed solution, but until someone convinces me I'm way off base, that's where I am.