The Galbraith Plan

Posted by: Michael Mandel on September 26

I like the plan put forward by James Galbraith in yesterday’s Washington Post. Here’s what he said:

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They’re called “loans.”

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn’t, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund — a cosmetic gesture — and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary — as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can’t save everyone, and those investors aren’t poor.

He’s got a point here. At least I understand what we are getting for our $700 billion in this case.

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Reader Comments

Joe Cushing

September 26, 2008 08:17 AM

I never understood the point of the cap. They could have at least adjusted it up every year with inflation. When it was put in place $100,000 was more money than an every day person could have. If adjusting it is too confusing to people, they could just put a line at the bottom of every bank statement saying what the limit is.

Rycoka

September 26, 2008 08:29 AM

This seems like a very good idea!

Jim D

September 26, 2008 06:15 PM

That sounds very, very interesting.

Frankly, I can't imagine why that wouldn't work.

But... surely if that was the answer, at least *someone* would have mentioned it before now?

I suspect it's drawback is that it still results in >200 bank failures in the next year.

There's a lot of banks that are insolvent right now.

I'm not sure we can handle that many bank failures.

Also, remember that the FDIC was saything that everything was hunky dory with WaMu only a couple months ago.

Or that Lehman was only thought to be $10 Billion in the hole - except that now that they're bankrupt, turns out it's actually $110 Billion instead.

I suspect that the real problem is that we're already totally hosed, and that any solution which actually brought true transparency (like this one) would just reveal that.

Instead, we're hoping to paper this all over for another 6 months until (optimistically) things improve or (cynically) until elections are over.

Still, I've forwarded the link (plus exec summary) to my congressman. I'm sure that they're casting about for solutions enough right now so that they might actually read it.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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