Pregnant Bank Bldg - Boston

Cleo Chews Over Hot Topics - My Plan: A Bailout for the People

I want to be the first of the major candidates to comment on the Bush Team's financial rescue plan.

First, the Bush Team has accurately identified the problem. Our financial institutions have trillions of dollars worth of illiquid assets on their balance sheets that they can't accurately value and, therefore, can't turn into cash. The cash is needed for them to be able to make the loans that keep our "credit economy" running. The Bush Team proposes to purchase these "toxic" assets in hopes that the banks will use the new money to start lending again. Someone has to start lending again, or the overall economy will crash. They are probably right up to this point, and most of Congress seems to agree.

Third, over the weekend the Bush Team came up with a 3-page legislative plan. They admit that most of the substantive provisions still have to be figured out, and the plan doesn't have even standard boilerplate provisions for oversight and judicial review of abuses of discretion, should they occur. A second year law student and someone fresh out of business school could have done better in the time allowed.

1.  Charter 50 new federal banks, one in each state. The stock will be owned by the U.S. government, in trust for the American People. The stock will be immediately offered for sale on the New York Stock exchange. The governor of each state will appoint a qualified person to be CEO of the bank in his/her state. I would hope the governors would choose wisely from the ranks of university professors and such like, but that will be up to them and the citizens of their respective states can ultimately hold them accountable for their choice.

2.  The federal reserve will immediately deposit $2000 in these banks in the name of each citizen residing in tha bank's state. This will immediately inject $600 billion into the economy. Under reserve rules applicable to federal banks, these new banks will have authority to make nearly $6 trillion in loans. Since federal banks are already subject to substantial oversight and regulation, there won't be an immediate need to create a new regulatory structure, although that should be undertaken over time.

3.  As soon as the new banks are in business, the government will sell their stock. Sale of stock in these new banks will almost immediately result in the federal government's recovery of the money expended to open the new accounts in citizens' names. There might even be a profit.

4.  The new banks will have the right to negotiate for and purchase the toxic assets held by old banks. This will permit the old banks to rid themselves of their toxic assets and get back into the business of lending money; provided they are willing to discount the assets sufficiently to induce the new banks to purchase them as long-term investments. By having 50 new banks handling the negotiations, a realistic market for valuing these toxic securities will be created much more quickly and accurately than will be the case if the United States Treasury is the only player in the market as the Bush Team is proposing. This approach will accomplish everything that the Bush Team's plan will accomplish, without socializing the banking system. That should appeal to both sides of the aisle.

5.  To make this work, the citizens will have to leave their new accounts in the banks for the time being, so that the funds will be available to get the economy back on track. This can be easily accomplished by requiring that accounts maintain a minimum balance of $ 2000 for the next two years. To unleash the power of capitalism and competition, citizens will be allowed to move their accounts to whichever of the 50 new banks they choose, as long as they keep their money invested. Interest on the accounts will be set by each individual bank as they think best for their success. After 2 years, the money will belong to the account holders, and they can withdraw, spend or keep it invested as they wish.

There you have it. It's simple. Creating new banks shouldn't be difficult. We've had them for years, long before the non-depository banks that caused this crisis even existed. It creates an instant market for toxic assets at prices determined by good old-fashioned competition. It injects billions of dollars in immediately liquid funds. It costs the taxpayer virtually nothing.

Now someone go get me that second year law student and that business student, and let's get this written up and done.

/s/ Cleo