Bailout 2.0 From the WSJ: “The U.S. government is expected to take stakes in nine of the nation’s top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that…

“Rescue Plan Comes Around to Views of the Academics”. I think it’s early to declare victory–especially since we’ve yet to find out that if the government does what academic economists advise that it will help–but it does look like the…

“Rescue Plan Comes Around to Views of the Academics”. I think it’s early to declare victory–especially since we’ve yet to find out that if the government does what academic economists advise that it will help–but it does look like the…

“Rescue Plan Comes Around to Views of the Academics”. I think it’s early to declare victory–especially since we’ve yet to find out that if the government does what academic economists advise that it will help–but it does look like the…

Moral hazard and affordability considerations must be put aside immediately and house prices stabilized.

How about this simple approach which can be implemented in one day and costs nothing at the outset:

Have the US government guarantee all primary home purchases in the next six months against loss of value as long as the owner stays in it for four years. If after 4 years the home is sold for 10-20% less than purchase price the government will cover 50% of the loss. 75% if over 20%.

Besides the aforementioned benefits, this approach would:
- Inject confidence in the market so people on the sidelines waiting for a bottom are much more likely to jump in, thereby slowing the downward spiral in prices.
- No application, approval or signup process, so it can be implemented by passing a bill and having a press conference.
- If market prices do stabilize no claims will be made and the program cost will be zero.
- If they don’t, banks include the government guarantee in their books when valuing the notes. Also, costs will be deferred and incurred over time (most participants won’t sell right at 4 year anniversary).
- Simple limits such as 1 million max property value, and one property guarantee per family (no corporations or trusts) will minimize speculation and abuse.
- Everyone is eligible automatically, so no preferential treatment, or gaming the system.

Wouldn’t it have been much simpler to just say that fractional reserve banking actually doesn’t work, if indeed it ever truly did for anything but the most basic, localized use? Seriously, if the government itself has to recapitalize banks I don’t see how that can be classified as other than systemic Fail.

Are we sure this is the reason for such little inter-bank spending? Lots of people and institutions are cashing-out accounts. Perhaps the banks CAN’T lend because their cash reserves are below permissible levels. The implications of this scenario are very different and more concerning than a simple matter of suspicion among banks.

Are there any near real-time data on cash reserve holdings of banks?

It wouldn’t surprise me if Russia, Iran, or North Korea take advantage of this crisis and the upcoming US election to launch some sort of attack or grab for territory.

Incidentally, PLEASE let’s not forget to fix the regulatory problems and the inherent conflicts of interest in the Rating Agencies. Let’s also get ALL derivatives traded on an exchange No more OTC B/S and no more SIV’s, Conduits and the like.

Then we can make a fresh start and wait for the next round of financial creativity, which WILL happen. One of the lessons our Wall St friends have learned is that you take your money before the sh*t hits the fan, you will be OK and the Government will pick up the tab so no problem. That depressing reality almost guarantees it will all happen over again if we allow them more than half a chance.