According to my favorite economist, Joseph Stiglitz, the proposed bailout will only make things worse. He says that the way to solve the problem is to help homeowners renegotiate the conditions of their mortgages, and he proposes a few other solutions, as well as explaining why the current proposals won't work...


A Better Bailout
By Joseph E. Stiglitz

September 26, 2008

(This is an excerpt)

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, to aid the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle-down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

If we design the right bailout, it won't lead to an increase in our long-term debt--we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt--already overburdened from a failed war and eight years of fiscal profligacy--will soar, and future living standards will be compromised. The president seemed to think that his new shell game will arrest the decline in house prices, and we won't be faced holding a lot of bad mortgages. I hope he's right, but I wouldn't count on it: it's not what most housing experts say. The president's economic credentials are hardly stellar. Our national debt has already climbed from $5.7 trillion to over $9 trillion in eight years, and the deficits for 2008 and 2009--not including the bailouts--are expected to reach new heights. There is no such thing as a free war--and no such thing as a free bailout. The bill will be paid, in one way or another.

http://www.thenation.com/doc/20081013/stiglitz


Joseph Stiglitz: Bailout Scam "Monstrous"

By Congress Check in Uncategorized on September 26th, 2008

Zogby International
September 26, 2008

Economy Nobel Prize Joseph Stiglitz last weekend said that the current bail out plan for the U.S. financial sector would be "monstrous" for US taxpayers.

"This plan is nothing else but a short term solution," said Stiglitz in a Sunday interview with Germany's Frankfurter Allgemeine Sonntagszeitung (FAS). "We're turning risk investment funds into the hands of taxpayers," pointing out that since no private investor wants to take responsibility for "risk investments, we're simply wall papering them on to the taxpayer, and this is monstrous".

According to Stiglitz the current crisis marks the end of a "disastrous economic model" and the end of the ideology "by which free and deregulated markets always function." As a consequence of the current situation the US financial system as well as the US government "has lost all credibility."

Stiglitz argues that to rescue the system and bring stability to markets, the US government is planning to buy from banks and financial institutions all "non liquid" assets that nobody wants and were the origin of one of the greatest and deepest crises ever faced by Wall Street and the US economy, the Great Depression of 1929.

For this reason, the Bush administration has requested from Congress US$700 billion for a special fund to purchase these assets and bring stability to financial markets. However, private estimates believe the cost of the final bill could be well over US$ one trillion.

But Stiglitz, who is currently a professor at the Columbia University in New York, the Bush proposal will not help solve the problem: "there's every chance that other banks could also be affected."

Stiglitz believes the root of the current situation is the sub prime housing problem and that government assistance must be directed at the mortgage problem. "This is only the beginning of the crisis," he said, and predicted that the US is on the brink of a prolonged recession.

The solution is not bailing out banks by eliminating "toxic" debts, but rather helping home owners renegotiate conditions of their mortgages.

http://www.congresscheck.com/2008/09/26/joseph-stiglitz-bailout-scam-%E2%80%9Cmonstrous%E2%80%9D/


More from Stiglitz...

http://www.bworldonline.com/BW100108/content.php?id=145

http://moneynews.newsmax.com/streettalk/bailouts/2008/08/07/119915.html