The revised financial rescue plan -- ownership would benefit taxpayers, not just bankers and brokers
As we learn more about the Treasury Department's plan to get credit flowing and restore confidence in the financial markets, it's becoming clear that they are finally moving in the right direction.
I opposed the initial bailout plan that would have put taxpayers on the hook for all the toxic mortgages, bailing out the institutions at the heart of this crisis with too little protection for taxpayers. I argued that we should get the same deal that Warren Buffett got for his $5 billion investment in Goldman Sachs: preferred stock that pays a dividend and an ownership stake. American taxpayers should settle for nothing less.
This approach -- a stock injection plan -- has a number of advantages. It avoids the tricky process of trying to figure out a fair price for the bad mortgages. It gives taxpayers a reasonable rate of return for our investment. And because we would own a piece of these institutions, if the company prospers, we prosper. George Soros has a column in today's Financial Times describing the reason he thinks it's the right way to go.
Hundreds of economists have gotten behind this concept--including Paul Krugman, who yesterday morning was awarded the Nobel Prize for Economics.
The banking industry, on the other hand, has strenuously resisted such a plan--in part because they are afraid that if we own a piece of their institutions we will want to fire the executives that got us into this mess. Sounds like a good idea to me.
In the original bailout bill, that stock injection provision was missing when the bill went up for vote in the House. Fortunately someone slipped it into the Senate version of the bill as an option---Treasury Secretary Henry Paulson would be allowed to take that route, but the Administration had made it clear they weren't interested. It seemed, at the time the revised bill made it through Congress, that it was unlikely that the Treasury Department would make the right choice.
Fortunately, reality has intervened. We learned late last week that Paulson has decided to take the option that the Administration didn't even want in the first place--as it has become clear that this direct injection of capital is needed to open up the credit markets.
Of course, preserving the viability of our financial system is only one step toward getting our economy back on its feet. In the short term, Congress needs to pass a second stimulus package that includes investments in infrastructure and increased aid to states to help ease the severe budget problems that we're facing. I also think Senator Obama's proposal today to institute a 90-day moratorium on foreclosures is a good idea. The country needs some breathing space to recover from the punch in the stomach it's received in the past few weeks.
And over the long term there is much we can do to refocus and rebuild our economy--ending the war so we can start spending the $400 million a day we're spending in Iraq here, addressing our health care crisis, and investing in renewable energy to end our dependence on foreign oil and create good paying jobs here at home.