MC.no.spin

I know a lot of you hate the Paulson proposal. I know a lot of you want something to get done, but don't know what.

With the latest Senate proposal, I no longer support the bill as written. It's FULL of additional b.s. Democrat and Republican chestnuts are stuffed into this thing. More deficit spending and future budgetary problems is the bottom line. And unlike the Paulson plan, these additional amendments are not an investment. Only the core part of the plan, the 700 billion, is. But the other bric-a-brac added to the bill is offensive to me. It is pure political trade-offs aimed at getting pet projects through on an urgent bill. I say no way.

Above all, the proposal SHOULD JUST ADDRESS THE PROBLEM AT HAND. It should not have things from Congressmen's wish list.

The investment approach was what appealed to me about the Paulson plan, and what other solutions fail to do, or are simply too weak to achieve liquidity and make the money market crisis improve.

If the money market crisis does not improve, many banks will fold up, credit will be very hard to acquire, companies will have to lay off employees, and a deep recession is likely. This will further depress home prices and the road back may be very long.

Getting liquidity back in the money markets is an urgent action needed to get banks loaning money again. Without such activity, the current GDP (standard of living barometer) cannot be sustained or increased. A recession is technically two quarters in a row of lower GDP. Under such low levels of liquidity, severe reductions in GDP, with commensurate increaes in unemployment, are predictable. Stagflation, including the high gas prices, will weigh heavily on Americans.

Thus it is of everyone's interest to solve this. How well this is handled will ripple across the world.

I am not in favor of the current Senate Bill, and want to find an acceptable compromise.

This is my proposal:

Achieve the necessary injected liquidity through a different tactic, yet still remunerative to the tax payer over time (ie. an investment rather than just a huge expense.)

The Warren Buffet maneuver to buy 5 billion in preferred stock of Goldman Sachs serves as the exact model to follow.

In short, the U.S. Government would buy preferred stock in banks and lending institutions that were sustainable, while assisting in the merging of those too insolvent to survive.

This would leave these mortgages with the banks to deal with, rather than a government that has proven time and time again to be too inept in dealing with such matters.

The preferred stock would have the same types of conditions that Buffet made on Goldman Sachs, such as demanding the government get 5 or 6 % off the top before any bonuses or golden parachutes are given to corporate executives.

If the raised capital through the preferred stock sale to the government (along with all the eager investors seeking to piggy back on a nice investment play) keeps them from going broke, the banks will then re-price the homes and mortgages. Those homes will get filled with people at right prices.

This stock can later be sold for a nice profit, just as Buffet plans to do in five years.

In addition, this proposal includes allowing for the FDIC max financial guarantee to be lifted to 250,000 dollars.

Also, the mark to market accounting method will be dropped as the standard to use in measuring the value of these CDOs. This will greatly increase their value on bank balance sheets and free up money for them to loan.

The exact amount of prefferred stock that will need to be purchased is of course difficult to estimate, but Paulson's number can be released in traunches. The progress will be reviewed before each new traunche is released.

Also, naked short selling on these CDOs will be banned (this has been being done greedily through an instrument called Credit Default Swaps) and also the up tick rule on shorts will be re-instated.

Transparency will be full and complete on these intruments, and regulation will be revised to accomplish full oversight of this area of investing. SEC Chairman Chris Cox will be replaced.

Would you be more approving of this proposal than the current one?

__________________

The heart of human intelligence is pattern recognition ~ Ray Kurzweill

John1234

I am wondering why it would not be better to give every American tax paying adult $5,000 dollars.

There would be a surge in consumer spending that would rally pretty much every aspect of the economy.
And Congress would not have to worry about re-election for voting for it lol.

On the surface it sounds like a ridiculous idea.
But I can not think of "why" it would not do just as much good, if not more good.
At the same time it patched the economy it would give us relief from the food and gas prices.
It would also be cheaper.

Can anyone explain why it would not work?

__________________
"We are all Georgians". No Mr. McCain, We are all Americans.

MC.no.spin

If a mod could add another poll option, it would be appreciated:

"Another proposal sounds better (please discuss)"

MC.no.spin

Your idea is very similar to the stimulus package done earlier this year. It does help to solve a GDP problem on the short-term, but the problem is much bigger than that. See OP. Another good thing to know is the difference between capital goods and consumer goods.

Summerwind

I heard one earlier that would have the newly gov't owned Freddie and Fannie buy directly from homeowners, their loans at 1/2 interest or 3.5% for those already with interest below 7%; all mortgages would be included be they ARM, 30F, 25F or whatever. Then extend the repayment time to 40-50 years which effectively puts a lot of money back into the pockets of those who are going down, stops the foreclosures, and should allow for fairly rapid recovery of the home markets; which supposedly are the base problem. Seems kind of out there, but it actually sounds like it would work, long term as the stimulus is a monthly reprieve, and short term in that everyone will quit panicking. Also direct buy outs, mean the banks unload the debts of many mortgages, though they don't get to choose which ones, we do.

MC.no.spin

Did you mean years?

I actually like the idea of these being re-financed with long term fixed rate mortgages very much. The proposal should have more language on this aspect, so thanks for bringing it up.

The HOPE legislation will help home owners who are paying a mortgage above 32 % of their income as well. This was just signed into law recently. I will need to further research how that can be utilized. But that is basically already ready to go as part of this plan.

Overall, the upside of this plan is the money is used to buy preferred stock with, rather than eat up a lot of bad mortgage paper.

I will call this

THE BEST INVESTMENT TO COUNTRY HEALTH

Or, the B.I.T.C.H plan.

Summerwind

Yes, I did, my bad.

Curious George

First of all, MC's proposal is more appealing than the current one, I think. However, I would prefer that the government do nothing. I completely understand and agree that the results of doing nothing would make things very uncomfortable for us all in the near term, but I think, in the end, the country would be better off. The people who engaged in this kind of behavior at all levels knew better, from the buyer to the lender to the bank who bought the mortgage from the lender to the brokerages who bought the mortgage backed securities. They all knew, or should've known, better.

What do we learn from this if the government acts? Probably nothing. We'll keep it in mind for the short term, but eventually the economy will rev back up, we'll have a long period of growth, and all of a sudden we'll be back in the same spot, or a similar one, all over again. Meanwhile, the government either grinds to halt with all this capital tied up in the market or leverages future tax dollars (ballooning the already ridiculous national debt even higher) to keep old programs running and to help new ones be created.

Plus, it's the principle of the matter. This is not what government should be doing, at least in my opinion. But this is another situation where my own personal economic interests interfere with my political and economic philosophy. Usually I hope my philosophy (doing nothing) wins out and then reap the rewards anyway when it doesn't. Essentially, I can't lose, since by the time this whole crazy deck of cards comes crashing down, I'll probably be dead and buried and this'll be somebody else's problem.