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Wednesday, Oct. 1, 2008

Rescuing Main Street

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The financial "bailout" bill will pass Congress and be signed by the president. The only questions are when that will happen and what it will contain. The "when" should be within days of Congress' return this week. The content is obviously more difficult.

The challenge is to make this a financial rescue plan for America and not just a bailout for Wall Street. Due to very lax regulation of new financial instruments over the last several years, we are in a situation where there are many bad loans out there. No one knows quite how bad the loans are and which banks are holding a disproportionate amount of them. As a result, banks are reluctant to make inter-bank loans, which is a major component in providing the liquidity to local banks so that they can provide the loans to our Main Street businesses.

Bailing out Wall Street alone does not automatically provide this necessary liquidity to the local banks. But a rescue plan-not a Wall Street bailout plan-would.

Look for some version of these components in any proposed rescue plans:

  • Provide adequate money. The $700 billion is probably necessary to calm the markets, but there must be a means for taxpayers to recoup their money plus interest or a profit on sale if the taxpayers take stock or warrants from these banks.
  • Help struggling homeowners. Keep as many people in their homes as possible by providing a means to rewrite existing home loans to be either interest-only for the next few years or extend them to 40- or 50-year loans with a fair fixed-interest rate of perhaps 6% to 6.5%.
  • Help your local banker. Get money into the local banks by buying their questionable loans at a market-determined discount. This may leave them very undercapitalized, so provide them the needed liquidity through loans or equity investments on terms that any smart private investor would require.
  • Don't reward bad behavior. To deal with the issue of moral hazard, we need to limit the salaries of the executives who made the bad decisions that required these extraordinary measures. People shouldn't benefit from bad decision-making.

The bottom line is that the U.S. economy will definitely recover from this mess. But lawmakers should create a rescue plan that puts the needs of taxpayers before the needs of Wall Street.