The Big Bailout, part II

September 30th, 2008 by Rick Drain

It was interesting to see how the big bailout vote failed yesterday.テつ The ideological center, moderates of both parties, voted ‘Aye,’ while the ideological wings voted ‘No.’テつ Since the ‘Noes’ were the majority, it’s hard to paint them as fringe or extremists.

From the left, Representatives wanted to see more help for the average taxpayer, and less forgiveness for the financial top dogs.テつ From the right, Representatives wanted less government involvement in private-sector businesses.テつ Both sides wanted a lot more oversight– which also imples more power to control ongoing decisions– over such an unprecedented huge financial allocation.

If the Executive decision makers (Paulson, Bernanke, Geithner, many others, and Cox and Bush, in order of descending importance and relevance,) want to pull more votes in to the center, and make a much better bill, they might consider changes in line with these themes:

  • You broke it, you bought it

The public supposedly indirectly benefited from all the financial wizardry, but the financial industry profited handily while the magic was still working.テつ There is no way in the world the public should be expected to pay for the cleanup.テつ The current assurances that we’ll “probably” get the $700B back is laughably insufficient.テつ The industry, the companies (and yes, their shareholders) need to be required to pay back every last penny they get from us, PLUS interest, PLUS a whopping penalty.テつ If it takes 30 years of renewed operating profit to pay it all back, OK, but it has to get paid back and more.

  • No blank checks

For any expenditure this big, there has to be complete transparency and accountability.テつ That is even more essential when it is public money bailing out irresponsible private enterprises.

  • ‘Fess up

Admit it: the idea that financial markets are regulated best when they’re regulated least is dead.テつ It’s a fantasy, never been demonstrated to be true, and it just blew up in our faces AGAIN.テつ Minsky, Soros, and many others have written about this in detail:テつ financial markets are inherently UNstable and require regulation to prevent national and international disasters.

  • Never again.

Whatever regulations are necessary to prevent this from happening again, make those regulations.テつ Move CDS to a proper futures exchange where counterparty risk can be monitored by professionals using time-tested methods.テつ Similarly, recognize that debt default insurance is insurance:テつ set reserve and capital adequacy rules like those in traditional forms of insurance, and enforce them.テつ Finally, reinvigorate enforcing the rules already on the books, such as the banking regulations that could have prevented some of the worst home lending practices.

  • Don’t reward recklessness.

The executives who drove their companies into this mess should make the first contribution to the cleanup.テつ If their company takes (ergo needs) public money (including the proposed debt sales and government debt insurance) then the executives and Board members who caused the problem should forfeit their existing stock options, restricted stock, anything unvested, deferred compensation, et cetera, et cetera, et cetera in all the glory of modern compensation methods.テつ Performance bonuses going back to at least 2006 (when the worst decisions were being made) need to be clawed back, by lawsuit if necessary.テつ Assuming that the execs are not fired as well, they can try to earn performance bonuses going forward by digging their companies out of the compost pile quickly and carefully.

  • A strong building needs a strong base

Don’t assume that this problem is solely fixable from the top down.テつ $700B in job training programs, mortgage workouts, health care support for all workers, et al., would do wonders to help fix the problem by beefing up the economy from the bottom up.テつ Dedication to (ie, funding, helping) public education would multiply those improvements into the future.