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Credit Crisis - So What is the Solution?

I've spent a lot of posting time on my blog lately talking about the problems in the credit markets and in particular the mistakes being made in desperately trying to come up with a "solution" I'm 100% convince the actions taken by the Federal Reserve, US Treasury and Congress over the last year have made the problem many times worse and the proposals being debated in Congress truly could lead to the downfall of our financial system.

While there isn't much discussion of alternatives in the main stream media there are a lot of smart minds out there, who correctly saw the cliff in front of us years ago, and who have outlined what they believe is the best path forward in open letters to Congress. Many of these share common theme, in that bailouts do nothing but make the problem worse unless the root causes are FIRST fixed. These root causes include excess leverage, Enron like accounting being openly encouraged on balance sheets, and a total lack of regulation in our financial markets are solved.

Below are links to three "alternative" proposals:

Karl Denninger - Open Letter to Senate/Congress

John P. Hussman, Ph.D. - An Open Letter to the U.S. Congress Regarding the Current Financial Crisis

Mike Shedlock - Open Letter To Congress On The $700 Billion Paulson Bailout Plan

Posted by Matt Heaton on 09/22/2008 01:39 PM

Comments (6)

credit crisis, bailout

6 Comments on Credit Crisis - So What is the Solution?

SEP

2008

I don't disagree, but what do we do RIGHT NOW to solve the short-term crisis. I don't think we have the time to fix all of the problems you mentioned before stepping in, as distatasteful as that is to most folks.

Rick: The problem is we've tried that over a DOZEN times in the past 14 months. Only to have created a bigger mess by trying to put on a short term patch. Yes, it's gonna cause lot of pain in the short term to fix it, yes there will be many financial insitutions that don't survive, yes lots of wealth will be lost BUT we will have a functioning economy and financial system a year from now. If we proceed down this path of short term fixes, we may not and that's what truly scares me.

the short term fixes are not working because there is someone new each day to get a handout, who is going to be next? This company is too big to fail, that company is too big to fail. Why didn't we bail out Enron? Because it wasn't an election year.

With no new jobs created - and a huge dose of uncertainty - what will put a bottom under housing prices? Is oil the new "gold" ??

There are so many better alternatives. Paulson's plan is not "necessary" at all. If you read it passes of "stabilizing markets" as almost a footnote. On the face of it, it blatantly seeks to serve his purposes whatever they might be, without the protection of adequate oversight.

I still favor chapter 11, though I think I'm the only one ;).

When a profitable company is hit by a very large liability, as was the case in 1985 when

Texaco lost a $12 billion court case against Pennzoil, the solution is not to have the

government buy its assets at inflated prices: the solution is Chapter 11. In Chapter 11,

companies with a solid underlying business generally swap debt for equity: the old equity

holders are wiped out and the old debt claims are transformed into equity claims in the

new entity which continues operating with a new capital structure. Alternatively, the

debtholders can agree to cut down the face value of debt, in exchange for some warrants.

Even before Chapter 11, these procedures were the solutions adopted to deal with the

large railroad bankruptcies at the turn of the twentieth century. Luigi Zingales

Robert C. Mc Cormack

I'm not for or against this bail-out, but there are a few things of note...

The Community Reinvestment Act is one of the things that made this problem come to light. Forcing banks to loan money to people that aren't creditworthy is NOT something the government should be doing, or groups like ACORN, operating through the government.

Lack of regulation is starting to NOT look like the problem, despite the cries of politicians. Stupid regulation DOES. So, it is possible that de-regulation might actually do more to get rid of stupid rules than regulating the poop out of it.

I also think that the real crisis isn't credit, but confidence. As you have previously stated, the banks don't trust each other enough to loan them money. The money is being flooded into the market, but it can't move. Everyone is hoarding. If the bail-out mean that the banks don't have garbage on the books to pass along, their isn't a reason to fear it.

People keep talking about saving homes for people... but that isn't the goal. We know that the people being foreclosed on can't afford the homes. They couldn't afford the homes before... The only way to bail them out is pay for part of the home... and the government should not and can not take a portion of the future sale of their home.

I think I can think of some fixes... I might have to post up what I'm thinking sometime.

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Credit Crisis - So What is the Solution?

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