Common sense – finally!

The original plan for the $700 billion bailout package (now renamed the “rescue package” to try to put lipstick on the pig) was to use it to buy bad assets from the banks and get them off the bank’s books. This was a terrible idea, unanimously opposed by economists of all persuasions. It put all the risk on the taxpayer. It bailed out the banks at no cost to themselves. To be effective, the government would have had to buy the suspect assets at more than they were probably worth. Congress only passed it, in the face of strenuous opposition, because they felt the need to be seen to be doing something. And it was probably one of the least effective approaches to solving the current problem.

Far better was the approach taken earlier with AIG – loan them money (at a high interest rate) and take back senior equity in the bank (“senior” meaning the government is first in line to get its money back) as collateral.

I see this morning that the government is finally coming to its senses and thinking about taking the loan-equity approach, perhaps spurred on by the British example (the British got it right the first time).

Meanwhile the second Obama-McCain debate made it clear that neither candidate has the slightest idea what is going on or how to solve it. They both used sound bites perhaps appropriate some months ago but completely disconnected from today’s reality. Whichever one gets elected, let’s hope they have the wit to quickly find some good advisers to deal with this matter.