Mallaby: better idea than Congress

OP-ED: A Bad Bank Rescue, By Sebastian Mallaby, Washington Post, September 21, 2008; Page B07

Seems like a smart argument from Mallaby on how to handle the banking crisis in a manner better than Congress currently contemplates.

(Thanks: jarrod myrick)

Comments

[stuart abrams]

Not very impressive. Raising new equity takes time. And, how likely is it that banks are going to be very successful raising new equity when (1) the Federal government has ordered them not to pay dividends; (2) the banks are holding large amounts of "off-balance sheet" investments that cannot reasonably be valued; (3) bankruptcy is a real prospect. Holding equity in Bankruptcy Court is of no value at all. Same problem with the US government buying equity. If the US government takes over the investments, it is at least getting something for its money and it will almost certainly recoup something; if the US government holds equity in a bankrupt entity, it has nothing. There are 2 problems here: short-term and long-term. Long-term, there are all kinds of solutions that should be discussed, all of which require revamping global economic institutions. Short-term, we need to do something immediately to deal with the fact that we are looking at what amounts to a credit moratorium, and if that goes on even for a matter of days, we are looking at cascade failure throughout the economy. In the short term, I see Paulson's proposal as the only way of addressing that. My concern right now is that ideologues on the right and the left are lining up to resist Paulson's program, and people in the middle, like Mallaby, get nervous about going off on a limb and they fumble around for alternatives, like this unimpressive column. As a consequence, nothing happens and it's 1932 all over again.

[Louis Heberlein]

How many Congress folks will want to try a new type solution just before an election?

[Jarrod Myrick]

Not only the ideologues and the straddlers but also every economist I've read today undulating and fumbling. Dying with your boots on it may be but we do have a full week and not a weekend before the cataclysm, don't we?

[Michael]

I can see two ways around Mallaby's concerns (take with contents of salt mine):1. Limit the buy-ups to bankrupt companies, buy the unknown instruments for enough money to pay off the their debts after the rest of their assets have been sold off. Hope the injects of money into the system via reduced competition and the debt payoffs stabilizes things before we run out of companies to buy those safe assets!2. Do the general buy-ups at the cost those instruments were purchased for.

In both cases, the government refuses to sell any of the bad debt until all examples of a given instrument are in its possession. That way, nobody (except maybe the people who issued them in the first place) gets burned by revelations of their true value or lack thereof.