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On the Economy

I've heard the phrase "too big to fail" as a justification for the economic bailout.

I agree with this sentiment because when enough banks fail, and credit markets get tight, industries that have not been playing fast and loose with risk and exposure are affected, and that means real people with good credit are likely to lose jobs, lose income, and lose their houses and can't even sell them in this market to get equity out to stay on their feet.

The government has been playing "laissez-faire" which is what got us into this mess... Not taking any action only continues the failure of government to act. Just because Congress/Corps of Engineers/City of New Orleans/State of Louisiana/FEMA/National Guard failed New Orleans before Katrina blew into town doesn't mean that we shouldn't expect them to do their job and pick up the pieces afterward...

While heads should roll for this kind of financial malfeasance (and let us never forget the price of failed "conservative" economic policy), it's time for the government to act to prevent additional damage to our economic health and national security (yes, I consider it a matter of national security-- historians can correct me if I'm wrong, but the downfall of the greatest civilizations in history have tended to be fundamentally economic in nature).

With that said, I'm not certain the government is pursuing the proper strategy with the current bailout plan.

First, is $700B too little or too much? If it's too little, it's going to be a tough pill to swallow later on to ask for more. I think a better strategy is to mark that value up... yes, up. But, make it a line of credit, meaning that it doesn't all need to be spent if there isn't a need.

By making the pool larger, and sending a signal that the pool will only be drawn upon in extreme cases, the extent of the need for the line of credit is a good indicator of the health of the market.

Secondly, the line of credit would earn interest, and need to be paid back.

Third, the terms of the lines of credit would require that the board of directors be appointed to include government regulators. If the companies are unable to make good on the terms of the credits extended, regulators begin to have increasing control and power to make changes, including, in extreme cases, to resell profitable divisions of the company to get their credit lines back, or to break up the behemoths into smaller digestible chunks for acquisition by local and regional banks.

Fourth, it would allow companies that didn't take over a lot of risk to consume the ones that did. With the proper asset disclosures, well-run, low-risk banks could use the lines of credit to buy the profitable pieces of other floundering companies.

We need more, not less, regulation, and that regulation starts with ensuring we don't have collateral damage from the rampant failures of these banks. It starts by ensuring accountability as a precondition to receiving the lines of credit, and if they fail to pay them back, they lose the ability to continue to do business as usual.

Finally, while I haven't examined the mechanics of how it would work, retroactively cancelling any golden parachutes during the great decline of these companies would send a clear signal to CEOs raiding the coffers of these failing institutions. Congress might call that the "From those to whom much is given, much is expected" Act. Capping salary and providing compensation in the form of stock and performance bonuses seems like a much better parting gift than just pure unadulterated cash. No performance? Then, no bonus! Drove the stock into the ground? Then use your certificates as kindling, or worse.