Progressive economist Dean Baker doesn't seem to think it is a crisis. He thinks something needs to be done just not rushed in to.
When Wall Street Needs Money, Rules of Journalism No Longer Apply
http://prospect.org/csnc/blogs/beat_the_press_archive?month=09&year=2008&base_name=when_wall_street_needs_money_rWashington DC’s Fox affiliate appears to have been taken over by Wall Street lobbyists. It has been reporting all sorts of unsubstantiated assertions that a credit squeeze is destroying the economy. You'd never know that typical 30-year mortgage is going for around 6.0 percent these days. Back when I last bought a home I had to pay 7.15 percent. But in Fox's sell the bailout campaign, there is no place for arithmetic.
Of course few people expect much journalistic integrity from Fox. On the other hand, the NYT enjoys a somewhat better reputation. However, with some of its reporting on the bailout, it's not clear this better reputation is deserved Today it told readers that “early on Tuesday, banks were charging one another the highest overnight borrowing costs ever recorded, as measured by an important rate known as Libor.”
That sounds really bad -- the highest overnight borrowing cost in history. Maybe it would have been helpful to tell readers that this data has only been compiled since 2001, a period of unusually low interest rates.
If we want a longer time frame, we can look at the history for the three month interbank rate. Bloomberg reports that the three month London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In the same chart, we can find that it was 5.23 percent a year ago.
Those interested in a little more history can find that the LIBOR rate was over 8.0 percent for most of 1990 and actually topped 9.0 percent on some days in September of 1989.
So how scared should we be that yesterday's interest rate was almost half as large as the three month LIBOR back in 1989? It would be hard for a serious person to explain how a 4.05 percent LIBOR can shut down the economy, when the interest rate has been more than twice as high in the not too distant past. But, that won't fit the NYT credit crisis story, so you won't see the historical data mentioned.
--Dean Baker
Some comments at that blog entry point out it is not just LIBOR but its ratio to the Fed rate that is so scary. I'm not sure if that is accurate or not but it seems that the overnight rates are not especially high. However, I have also heard that the volume of overnight lending is very very low. International lending was even zero one day according to a couple of The Nation reporters I heard on a podcast. I know this conflicting info doesn't really help with the confusion I'm just pointing out there are other perspectives out there.
If something needs to be done then there are better ways than the toothless plan that just failed the house. Nobel prize winning progressive economist Joseph Stiglitz gives some outlines to what to do.
Here's a Better Bailout Plan
http://www.alternet.org/workplace/101034/here%27s_a_better_bailout_plan/Here's a Better Bailout Plan
(snip)
And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us?
There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products -- which they created -- and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer -- and for no return. The second problem is that there is a big and increasing hole in bank balance sheets -- banks lent money to people beyond their ability to repay -- and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.
The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market -- and letting it deteriorate at taxpayers' expense.
The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.
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.
(snip)
Finally here is a link to one more article with other ideas (and some of the same ones as Stiglitz)
The Fiscally Insane Bailout Bill Might Not Pass -- Here Are 5 Reasons It Shouldn't
http://www.alternet.org/workplace/100700/the_fiscally_insane_bailout_bill_might_not_pass_--_here%27s_5_reasons_it_shouldn%27t/?page=1
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