Here’s a balanced article on the bailout plan, discussing Nouriel Roubini’s suggestions and the effect of credit drying up on the average American citizen. Courtesy of Stormy, at Angry Bear. 
Wall Street, Meet Main Street
By Stormy
For the man on the street, the proposed bailout seems like nothing more than handouts to the rich. To him, the fortunes of Wall Street are distinguishable and separate from his fortunes. "Let the suckers sink."
While I deeply sympathize with this view, we all must see how what is happening on Wall Street affects everything, from house mortgages, to car and student loans, to credit cards, and more.
Quite simply, credit is drying up.
If credit disappears, then everyone–rich or poor–is affected. The farmer needs a sizable loan to carry him through the rough times. The poor student needs a loan so that he can position himself better in marketplace. The small town may to float a bond to cover a much-needed fire engine. Already, student loans are becoming increasingly difficult to obtain. Car loans and mortgages are becoming more and more problematical.
To tell Wall Street to take a hike makes for a good sound bite, but it may not be really wise. What happens on Wall Street governs the level of credit, the grease that makes loans and bonds possible.
The problem is: How to fashion a comprehensive plan that addresses everyone’s needs. Our country is mired in debt. Only the very well off can stand alone, fretting foolishly over a million lost here or there. The rest of us, even if all our bills are paid, stand to suffer as the economy crashes around us. Jobs will be lost; incomes will dwindle.
To understand the depth of our dilemma, I would like to go through Nouriel Roubini’s rescue plan. In his solution, he does hit most (not all by a long shot) of the buttons. I do this summary as much for myself as for others.
Take note: We are faced not with a mere recession, but a real depression. It is no accident that parts of the Roubini plan harken back to the Great Depression.
Roubinis plan, which is far more intelligent that what so far has appeared in the public media, only begins to touch on our real difficulties. After outlining his plan, I will touch on some of these difficulties.
The outrage on the street is, in the final analysis, soundly based.
Roubini’s plan centers around three different kinds of proposed agencies: A Resolution Trust Corporation (RTC), a Home Owners Loan Corporation (HOLC), and a Reconstruction Finance Corporation (RFC).
Each of these agencies would be modeled on similar ones in the past. (The HOLC and RFC functioned during the Great Depression; the RTC, during the savings and loan crisis in the 1989.) Each addresses a different segment of the problem. Each will require real thought and planning.
There is no easy fix here. Unfortunately, our leaders have diddle away precious time, acting with little foresight. That Wall Street was making a bundle seemed to impress everyone. Little heed was paid to the dangerous currents into which we are now helplessly drifting.
The RTC and Wall Street
Right now, the central problem being addressed is Wall Street. If it goes. credit goes. And if credit goes, the economy freezes. Like small fish, you and I are caught in the ice. Following is Nouriel’s proposal for the new RTC:
in exchange for the purchase of illiquid asset (at whatever price it is agreed) the government gets preferred shares in the financial institutions that [are]senior to existing common and preferred shares and that are convertible into common shares to allow government to participate into any future upside
In short, you and I, as citizens, now have a stake in those firms. Because we are now "entrepreneurs" and now are taking the risks, why should we not get a piece of the action?
the banks will need more capital if they are undercapitalized and they have not fully reserved/provisioned for the losses coming from writing down the asset being sold to the government. So you will need to inject further actual public capital in the form of preferred shares in the financial institutions
And for those already investing in these firms, they, the existing shareholders have to take a nice haircut:
the existing shareholders of the banks need to take a first-tier loss to minimize the risks for the government share. How to do that? First, you need to suspend dividend payments on common share and possibly even existing preferred shared; you also need to force to partially match the public capital injection with new Tier 1 capital
In short, any losses hit them first before it hits you and me. And all those handsome dividends they paid are suspended. Nice.
Even after we generously remove their bad debts, they may still need working capital to make loans to you and me.
you will need to inject further actual public capital in the form of preferred shares in the financial institutions
And what is the complaint of all this from those who profit from and love free markets?
Government interference!
To which I say, the government, like any good investor, is protecting its interests. And its primary interest is to see that this economy functions; it’s secondary interest–and just as important–is to see that it profits from it. You who love unregulated, freewheeling markets are threatening the well-being of all us. Sorry, guys. Take a hike and a haircut. Go suck a thumb in your gated McMansions.
To put it another way, the majority want this economy to function. The majority wants the government to make money so that it can have better schools and better health care. You are outvoted.
Additionally,
public and private recapitalization of financial institutions unfairly benefits unsecured creditors (all creditors but insured depositors) of such institutions. So, you also need to convert some of this unsecured debt (the sub debt and other debt unsecured debt) into equity (a debt for equity swap). Such swap further reduce the leverage of the financial system (leading to a lower debt to equity ratio for financial institutions)
The RFC and banks
Curiously, here is where Nouriel is weakest. During the Great Depression, the RFC made loans to more than just banks. Aid was dispensed to state and local communities, to businesses, and railroads. For Nouriel
the banks will need more capital if they are undercapitalized and they have not fully reserved/provisioned for the losses coming from writing down the asset being sold to the government. So you will need to inject further actual public capital in the form of preferred shares in the financial institutions ( this is what the RFC did during the Great Depression).
The HOLC and the Homeowner
Nouriel’s details here are sketchy, but clearly we have to address the massive private debt under which many households struggle.
During the Great Depression the Home Owners’ Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates.
Allowing distressed homeowners to remain in their homes does help. Granted, their homes will now be worth less, but their mortgage load will be reduced accordingly. With reduced value will come reduced taxation. Communities that depended on property taxes will be hit. There is no escape. Schools that depend on property taxes will be hard hit. Health care costs that now are spiraling out of control will be even more deadly. The burgeoning industry in health care will take a serious hit, soon to be affordable only by the very wealthy.
For those who do not own homes and for those who are going from paycheck to paycheck, robbing Peter to pay Paul, what do we do? This issue needs to be addressed. "How" is the question. As the economy shrinks–and it will–the poorest will be hit the hardest.
Regulatory Reform
In another piece, Nouriel addresses the issue of regulatory reform. For the purposes of this piece, suffice it to say that the U.S. missed that boat a long time ago.
What’s Ahead
What concerns me is the engine that will drive America away from the pit of depression and back into the light. We are in for hard times. Right now, as we can see from how Nouriel’s plan is weighted–he gives more detail to Wall Street than Main Street. He does not address what I consider to be the central issue of our economy: How it should create wealth.
That issue is central to any recovery. Otherwise, we are in not only for extended stagflation but also for a spiraling down of our standard of living with little hope for the future.
Our credit crisis has gone hand in hand with our growing trade deficit. For some not to see the connection, I find disturbing. The strength of a country lies in what it has to sell to others. Sound trade policy is essential to our recovery.
Do we need to direct our resources more pointedly? Do we need government to strengthen those industries that will be the engines of the future? Nouriel does not say.
How do we staunch the job bloodletting as more and more of our companies find cheaper jobs and services overseas? Nouriel does not say. In fact, I rarely hear these issues mentioned among professional economists. We are wedded ideologically to a free and open global market place, a marketplace that has been badly structured in terms of the everyday American worker.
We have allowed and encouraged a massive influx of cheap illegal South American labor, which benefits the well-to-do but not our workers. No one speaks for workers here.
According to a recent study, the U.S. is now behind China in terms of technological competitiveness and that China will soon surpass the U.S.
in the critical ability to develop basic science and technology, turn those developments into products and services – and then market them to the world.
Who gave the world the Internet? Who seeded the world with computer technology? We did. And where did the producers of that technology go for production? One guess. My brother who has patents in VOIP told me in no uncertain terms: "We get the ideas going; then the company sends them abroad for further research and development." Cheaper. Look again and you will see the research going abroad.
Unless our noses are plunged into its stench, we look the other way as foreign sweatshops make billions for American and other Western companies–and the stock market cheers. All we can then express is moral outrage. Take a walk on the poor side of some of our communities if you want outrage. Now consider the consequences of a society bred to spend but not to produce.
We now have a society bred to be almost purely financial, a society of moneylenders that use money just to make more money–arbitrage here, leverage there. Everywhere the moneylenders have their hands out, always figuring new ways gouge their customers, always figuring a new gimmick.
We have forgotten what real credit means. We have forgotten its real purpose. We have forgotten how to produce real wealth, how to compete as a country not as an individual firm.
If our firms go abroad for cheaper labor or cheaper taxation or to take advantage of currency dislocations, we should assess them a price for doing so.
If you really listen to the outrage about the bailout on the street, it is there in the lost jobs, in the day-to-day struggle to survive, in the impossible health care costs, in the equally impossible cost of education.
We have a lot of serious thinking to do.
