Former Top Officials Propose Bankruptcy Reorganization of Financial Sector
promoted by roxy original publication date/time:2008-09-18 09:06:10 -1000 (HI time)
This proposal "Resurrect the Resolution Trust Corporation" was offered as an op ed in yesterday's Wall Street Journal. It was written by three former ranking officials with responsibility for financial affairs. They are Paul Volcker, Chairman of the Federal Reserve under Carter and Reagan, Nicholas Brady Secretary of the Treasury under Bush's father, and Eugene Ludwig, Comptroller of the Currency under Bill Clinton.
The three share the advantage of being old enough to remember a world in which derivatives did not exist, and in which "moral hazard" meant protecting depositors by limiting what financial institutions could do with their money.
This link will take you to their proposal:
(If it doesn't work you could try through the blog Calculated Risk) I found it through Eurointelligence.
I know there will be a lot of people who will say "how can you support this, don't you know who these people are." Of course I do. I'm also old enough to remember what they did, and I remember writing plenty of pieces of invective attacking both Volcker and Brady: Volcker for his interest rate policy, and Brady for the so-called Brady Plan reorganization of Latin American debt. I had especial fun once with a piece directed at Brady called "When you float a trial balloon make sure it isn't made of lead."
But anyway all that's water under the mill, I hope. The three of them are criticizing Paulsen and Bernanke now for exactly the right reasons, I think. They write:
right now the system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.
Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy that so far has held up reasonably well.
There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.
The pathology of this crisis is that unless you get ahead of it and deal with it from strength, it devours the weakest link in the chain and then moves on to devour the next weakest link. A deteriorating financial system, diminished economic activity, loss of jobs and loss of revenues to the government is enormously costly. And the cost to our citizens' well-being is incalculable.
Crisis times require stern measures. America has done well in the past to face up to economic turmoil, take strong measures, and put our problems behind us. RTC-like mechanisms have worked well in past crises. Now is the time to take a similarly forceful step.
The three are proposing an orderly liquidation of the problem through what I would call a bankruptcy reorganization. This is opposite to the argument that insists we have an ever growing liquidity problem (not enough credit in the right places at the right time and at the right price). What they are talking about does happen to be what is needed now. It is what Paulsen and Bernanke have refused to recognize and tried to avoid for more than the last year. It is why I wrote that little squib yesterday about Bail'em and his Ass. The three former officials are proposing an approach which would work, and buy time for further necessary steps.
I believe it is an approach which should be supported by people who are beginning to fear that everything they have worked for might be at stake, and really also to doubt what kind of future there is going to be if things continue to unravel the way they have over the last year.
I hope that others will agree with this proposal, given the respect which is without doubt accorded to its authors, men undoubtedly of the highest professional competence and probity, and help circulate it. It will for sure be opposed by the radical wings of the body politic. But hey, what would a chicken be without wings? Sorry, this is the US, not France. What would an eagle be without wings?
I'm not a fan of "let it all come down". Nor do I think it is right to sit back when there are things that can be done. Nor do I think it right to remain silent when things are being done that are wrong or unjust, or both, like the bail-out nonsense. I just don't think with Paulsen and Bernanke in charge there is an alternative. This proposal changes that and can also give Congress something to work on quite both quickly and effectively, if they get the back bone to do it.