Bailout Bill Fails... Time To Nationalize

228-205, it's down. So what should we do now?

Loyal readers know that my agenda throughout this whole process has been to promote a taxpayer asset grab, in which we use our superior bargaining position to snag a whole bunch of bank equity and sell it for profits. First, we tried doing that the nice way with Paulson's help. That has failed. So what next? Brad DeLong was telling you what a few days ago, when we thought we were here:

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization.

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer. And it is the best way to deal with the moral hazard problem.

It might work like this. Congress:

-grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
-requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
-the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
-grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
-requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.

In addition, Congress:

-grants the Treasury the power to issue up to $500 billion of troubled asset redemption bonds, the proceeds of which are then to be loaned to the Federal Reserve to be used to cover the liabilities of those liquidated firms that the Federal Reserve judges it is in the interest of the taxpayer to have their liabilities paid off in full.
-Paulson had his shot. It's time for the Democrats to pass a nationalization in the taxpayers' interest bill and dare Bush to veto it. If he does, then announce that the congress will pass it again the day after the election. -And if he vetoes it again, announce that congress will pass it yet again on January 21, 2009.

Comments

[Stephen]

I'd like to see this. In fact, if the Democrats had courage and brains, they'd not only do this, but add a whole host of other truly progressive policies to it.

Unfortunately, I still doubt there's an excess of either courage or brains the Democratic caucus, and that's not taking into account the number of Democrats in Congress who are just as compromised by the financial industry as the Republicans.

[low-tech cyclist]

What Stephen said.

[litbrit]

What Stephen said, yes.

I said something similar while talking on the phone with Sir C this afternoon, and it's been brought up here at the Cogblog repeatedly--what about a package whereby government goes into the lending business directly? And as for these banks who've taken all these wild risks, well, they can sink or swim--fuck 'em--just like those of us in small business who've taken risks and sometimes lost and sometimes won--like most businesspeople, R and I have never, ever, ever been as reckless as the least reckless of the parties involved here, and that's because we knew we'd sink if we lost everything.

It's easy to be a gambler when someone else hands you the prepaid chips--just ask John McCain, ahem.

[Scott K]

I'm VERY sympathetic to the idea of such a proposal, but the facts are that the president would veto anything like this and I don't see the Democrats finding a veto-proof majority. So it would all get condemned as political posturing. There are some sell-out Democrats out there, for sure, but they're not all bad... otherwise, I wouldn't be voting Democratic!

I hate the sense of slapping on band-aids until after the election...

[Marcin Tustin]

Why are you talking about putting these powers in the hands of the Fed rather than FDIC? FDIC has actual experience of doing this already.