Five Alternative Bailout Plans

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The Bush administration is pushing its bailout plan by claiming the only way to save the economy is by having the federal government buy $700 billion worth of bad paper from big financial firms that screwed up. Conservatives should hate this because it is a massive federal intervention in the market. Liberals should hate this because it’s a handout to the richest people and companies in America. But the Bush administration and Wall Street are insisting it’s the end of the world and this is the only choice. Well, is it this or nothing? Many on Capitol Hill—especially Democrats—are buying the general premise of the White House plan but insisting on lipstick-on-a-pig modifications involving CEO compensation, taxpayer protection, and oversight and transparency. But are there other approaches to the problem besides putting the Treasury in charge of a $700 billion fire sale? Yup. Here’s a quick roundup.

(1) The Planners: The Republican Study Committee, a group of some of the most conservative Republicans in Congress. The Plan: Two-year suspension of the capital gains and dividend taxes to “encourag[e] corporations to sell unwanted assets.” The Problem: It won’t work. Over at Time, Justin Fox says the RSC plan “seems to be a joke,” and explains that it would just make matters worse by actually discouraging banks from unloading bad mortgage-backed securities.

(2) The Planners: Eric Cantor (R-Va.) and some House Republicans. The Plan: Instead of having the Treasury buy mortgage-backed securities outright, insure them and charge premiums, paid to the government. The Problem: It almost certainly won’t work. Marc Ambinder has a great explanation of why, but a commenter at Time sums most of it up in a sentence: “Writing insurance requires either a long history of past events or, at a minimum, knowledge of present market prices.” There is neither a long history of past events nor a knowledge of present market prices in this case. In fact, as Ambinder points out, there’s not even a market for the products that would be insured. That’s the fundamental problem, and insuring them wouldn’t fix it.

(3) The Planner: Our own James K. Galbraith, an economist. The Plan: Prop up the FDIC. Eliminate the “pointless” $100,000 cap on deposit insurance, put a half-trillion dollars in the FDIC fund, give it extra funding for more employees, and keep another $200 billion in reserve. (There’s more in Jamie’s article, but the FDIC part is the heart of the plan.) The Problem: It may good policy, but so far, there are few takers in Washington. And there’s no major political constituency advocating for it in the way that Wall Street is calling for a buy-me-out bailout.

(4) The Planner: Senator Bernie Sanders (I-Ver.). The Plan: Make the rich pay for the bailout. Impose a temporary surtax on incomes over $1 million. Pass an economic recovery package that puts people back to work. Then re-regulate and break up any companies that are “too big to fail.” The Problem: See #3.

(5) The Planner: Hedge Fund Gazillionaire John Paulson. The Plan: Buy Wall Street. No, seriously: Paulson thinks taxpayers (or, more specifically, the Treasury) should buy huge amounts of senior preferred stock in banks. Kevin has more on this, which he points out essentially means nationalizing troubled banks. The Problem: This plan essentially means nationalizing troubled banks. Conservatives will be queasy about it; even Kevin Drum, a liberal, is queasy about it.

Have you come across any other alternative plans? Do you have any suggestions of your own? Leave them in the comments.

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We didn't know what to expect when we told you we needed to raise $400,000 before our fiscal year closed on June 30, and we're thrilled to report that our incredible community of readers contributed some $415,000 to help us keep charging as hard as we can during this crazy year.

You just sent an incredible message: that quality journalism doesn't have to answer to advertisers, billionaires, or hedge funds; that newsrooms can eke out an existence thanks primarily to the generosity of its readers. That's so powerful. Especially during what's been called a "media extinction event" when those looking to make a profit from the news pull back, the Mother Jones community steps in.

The months and years ahead won't be easy. Far from it. But there's no one we'd rather face the big challenges with than you, our committed and passionate readers, and our team of fearless reporters who show up every day.

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