We Need a New Plan

Obviously, even if the Bailout Plan passed by a simple majority, it was not a document any Congressman was going home to brag about to his/her constituency. Main Street clearly doesn't understand or doesn't seem to care that the credit crisis, if it persists, will have a direct impact on their lives. What steps do we need to take:

1. The President, Mr. Paulson, and Mr. Bernanke need to have a heart to heart with Congress and in simplified terms explain the connection between Wall Street and Main Street.

2. Once Congress understands the elementary economic relationship of the credit crisis and its effect on John Q Public, then the Congressmen need to hold meetings in their home towns to discuss the issues with their voters.

3. When I wrote how I thought the new Fund would earn a profit for the taxpayers over time I had suggested hiring professionals to manage the process and give them economic incentive to be on the same team as Main Street. If I object to anything in the Plan, it is the vagueness of the price the Government would pay to buy the distressed mortgages. The fair price should be one where the private sector would buy it to earn an adequate return. That would not be a price to maturity where the Government might overpay. Overpaying is a clear and decisive objection by all parties unless it includes other economic value given by a company to the Government.

4. Perhaps the Plan's method of attack needs to be altered. If assets are not written down to today's perceived value, then the private sector will stay on the sidelines. At fair distressed prices, the private sector has plenty of capital to buy securities and could probably raise plenty of more when needed. If the financial sector doesn't get flushed out such that the excesses of the past decade dissipate, then the road to recovery may last ten years like it did in Japan.

5. Let's assume the Government can get companies to write down their assets to fair market values. As discussed in my other articles, the financial institutions will need to raise additional capital to remake themsleves financially sound with a strong capital base to grow and expand their businesses. My new proposal is to have the Government force these writedowns and then provide the necessary capital to the financial institutions in the form of a convertible preferred stock. In this manner, the written down assets can now be sold to the private sector as the Government has recapitalized the company. This will be a good formula to unlock the mortgage market and provide an impetus to improving the credit crisis. The taxpayers will also have an improved chance of earning a reasonable return on their money.

I am sure many new ideas will be tossed around in the next few days but the bottom line is that if nothing is done to deleverage the financial system and unlock the credit crunch, this economy is heading for the abyss.