A Prescription for Recovery

By Robert H. Dugger
Monday, September 22, 2008;



This week, Congress is expected to commit hundreds of billions of taxpayer funds to a revitalization program to halt our financial hemorrhaging. Twenty years ago, in the midst of another financial crisis, I was part of a banking industry effort to solve the savings and loan problem. The result of that effort was the Resolution Trust Corporation, which, under Bill Seidman's masterful leadership, cleaned up the S&L mess in 48 months.

The situation then was very different. The S&L problem involved only one sector of the economy and was just 3 percent of gross domestic product. We were not so dependent on foreign savings, and the crushing pressure on our federal budget from tax policies and entitlements was far off. This crisis is many times larger than that created by the S&Ls. We are deeply dependent on savings from other countries, and our fiscal resources are limited and shrinking.

One lesson is clear: If Congress commits money without firm principles to guide its use, the cost to taxpayers will be far higher and the economy will remain weaker longer. Before the 1989 legislation, efforts to stem losses growing inside the S&L industry lacked firm principles; as a result, they did not remove the swelling tumor of losses and in some instances actually helped it grow.

Here are five principles Congress needs to impose now:

· Put individual taxpayers first. The program needs to focus on keeping taxpayers in their homes, strengthening their local economies and protecting their savings. It has to help Americans broadly, not just a few, and certainly not the managers who got us into this mess.

· Minimize taxpayer costs over the long term. Short-term thinking created this crisis. Only long-term efforts will end it. The S&L crisis was limited to the financial sector. It was best addressed on an aggressive basis, bank by bank. This meant that least-cost resolutions were the way to go and that the RTC should buy and sell assets quickly, which it did. But the current situation is systemic. It involves our entire economy. This means the revitalization program should buy distressed assets early and plan to hold them for a long time. The goal is to make the economic adjustment as shallow as possible, to limit the injury to families, jobs, homes and savings.

· Avoid creating an interim program. This program must not be like the S&L "rescues" of the mid-1980s, which merely enabled the problems to grow. The program needs to have the capacity, flexibility and scope to address the vast size of the current crisis. Congress should put no dollar or time limit on our national commitment. Yes, markets will want dollar figures. If numbers must be given, let them be in statements about the program -- and let them be big. Do not shy away from saying that the United States is prepared to commit a trillion dollars over the next 10 years to halt this meltdown here and now.

· Remember global investors, whose confidence we must regain. This crisis is an economic heart attack, but not a fatal one. We must assure global investors that we are fully prepared to cover American losses. No one suggests that this will be easy. The budget choices being forced on us will be profoundly difficult. But we have the strongest democracy and the most durable legal and financial systems in the world. We have the capacity to absorb losses and the ability to reshape our economy. Foreign investors need evidence that we are committed to the changes necessary for recovery. When they see that, they will buy our private assets again.

· Do not hesitate. Bill Seidman's greatest lesson was action. It is far better to deal with a few assets, even without knowing quite what to do, than to do nothing while trying to work out the details. Whoever is in charge of the revitalization program must not hesitate to buy the assets that institutions offer -- these will be what is burdening the institutions and clogging our credit system the most. There are many strategies for buying assets and infusing capital that can protect the program from paying too much and ensure that taxpayers benefit from price increases as recovery occurs. The key is to get the assets in-house quickly and learn how to manage them effectively.

The writer is a managing partner of a global hedge fund and chairman of the Partnership for America's Economic Success. As policy director of the American Bankers Association, he led a panel of bankers in developing a plan that became the RTC.

http://www.washingtonpost.com/wp-dyn/conte...2000895_pf.html

What I don't want them to do (Congress) is jump in so fast to what the President wants, without weighing a few things - that we basically end up with the almost everyone voting for something and a year later having huge regrets (ie, iraq war).

A trillion dollars is nothing to sneeze at, especially when it doesn't guarantee the problem will be solved.

At the moment I don't believe either campaign, you have dufus McCain and then you have Obama who's top two economic advisers where Fannie and Freddy CEO's.

What we have is a mess, that no matter what they do it's going to fall on us to pay for.

At least Dugger is putting the taxpayer somewhat at the top of the heap.

Terra, call me biased but I think that the charge that Obama's top two advisors were from Fannie and Freddy has been pretty well discredited. Don't believe me or their campaign, check out the independent fact check people. And while those are two huge corporations had a role in this mess the problem goes well beyond them.

Yes, it is a mess, and it is hard to see how we get out without the taxpayer paying a good bit to fix it. It is like getting hit by a poor and uninsured driver, you can only get so much money out of him or her to fix your car. It is hugely unfair, but you need to fix your car. But I would squeeze the companies bailed out to the maximum extent possible, meaning both the shareholders and the executives.

I like Drugger's thinking as far as it goes...

Well I'm sorry Arne, but Franklin Raines and Jim Johnson are indeed two of the four people on his economic team. I'm not talking about contributions here, I see in another thread where that has been stamped out. I don't need to go check out their independent facts, I remember well during the Clinton years what happened with both of them.

There reaches a point when the middle class who are barely making it - get tired of fixing everyone's car but their own.

As I said, at least Dugger seems to have a more common sense approach to this than other outlines I've seen bandied about.

JOHN MCCAIN IS THE 100% CAUSE OF ALL THE PROBLEMS

Not his advisers, not Obama's advisors

JOHN MCCAIN HIMSELF IS 100% THE CAUSE OF ALL THE PROBLEMS, THANKS TO HIS COLLUSION WITH BILL GRAMM AND BILL CLINTON

Raines is a major advisor because he apparently took a few phone calls from the campaign and talked about mortgages and stuff? Johnson is a big wheel because he was to be appointed to the VP vetting team and then was bounced a day or two after he was announced? I don't see it.

Terra, our economy is the car that needs to be fixed. I would try to identify and squeeze the greedy and guilty as much as possible, but I don't have too much confidence that we can get them to cover all of the cost of the fix.

And while Dugger is making a lot of sensible proposals here, he is not talking about squeezing the guilty and greedy. I tried to offer some ideas on that myself in another thread. Now I am not anywhere near the expert that Dugger is, some of my ideas may be half-baked (and of course someone would have to clothe them with a huge amount of detail) but I also think that Dugger may have too many friends and associates among the greedy and guilty to be willing enough to go after them and squeeze them for what they could be squeezed for.

So far I don't trust any politician for the reason that none are fully admitting there is no solution for the short term, the bailout can only keep the system functioning marginally and the underlying problems will last at least a couple years. Fannie and Freddie weren't the real problem, the Fed and lack of regulation created and grew the mess. In fact with the advent of CDSs being active in the mortgage industry Fannie and Freddie acted like the canary in the mine if anyone would've bothered to listen, their role in liquidity could be replaced at that point.

I trust Obama more than McCain on this for exactly the same reason I feel that way in general, he listens to a variety of positions and thinks about it, McCain just goes by what whoever he trusts in that field tells him his position should be.

I agree with your first paragraph almost 100%.

I was half arsed listening to a program on the radio that said AIG would have been fine for another year, and might have even pulled out of this unaided if everyone wouldn't have started bailing. True or not, I don't know.

Terra, Raines name was tied to Obama in a Washington Post article some time ago. It was in a little noticed section ( I can't remember the name of the section) but not in a prominent section of the paper and went unnoticed until McCain used him in an ad. At that point both the Obama campaign and Raines denied categorically that he was in any way involved with the campaign. THe Obama campaign at that point requested a correction from the WP which has not been forthcoming. Their error was in missing the original comment I suppose but they deny that he has had any connection to Obama.

Johnson, yes. He was dropped from the selection process when the connection to Fanny Mae was highlighted. No one has said he was an economic advisor, only that he had been on the VP selection team with Caroline Kennedy.

Perhaps you have inside information no one else has ?

Last I have read former Federal Reserve Chairman Paul Volcker, and former Treasury Secretaries Robert Rubin and Larry Summers were among the most notable. Not to mention , Warren Buffet.

Key economic advisers include a few Washington veterans such as Michael Froman, a Citigroup executive and former chief of staff to then-Treasury Secretary Robert Rubin.

There are also several scholars from prestigious universities whose approaches are anchored in dominant market-oriented economic thought. One is Austan Goolsbee, a 38-year-old star University of Chicago Business School professor and New York Times columnist with centrist Democratic views who has argued for eliminating tax returns for many Americans with simple finances.

Alan Blinder, former vice chairman of the Federal Reserve, described Obama's top economic advisers as "mainstream with a dash of creativity."

"These are people who think new thoughts -- within the mainstream, new without a capital N," said Blinder, now a professor at Princeton University.

Nowhere do I find mention of either Raines or Johnson. Other than in the opposition's rhetoric of course.

There were some major ifs (the biggest one being confidence) but barring liquidity problems AIG was solvent for at least another year. Then again liquidity and confidence are the problem, so I'd say about 1 in 3 AIG didn't really need the bailout until at least December so the move surprised me. I also think it was a mistake to do the big bailout this early, a couple weeks of dead panic would've helped bring all the players into line and the damage would mostly be quicker, not worse. But politicians need recess to campaign so I guess doing it right was off the table, at that point waiting until after the election wasn't an option.

Good lord, these quotes are confusing me! I bolded your paragraph - and that is my take on it, too. It's pretty sad that we are playing with our entire economic future based around a campaign deadline and senate recesses.

I don't remember a time when campaigns and recess weren't the priority (just times they made sure everyone knew they'd stayed a bit longer to get votes that way), that's why I never trust anything doe right before a recess.