Wall Street and The Economy, The Cost Effective Bailout

The Cost Effective Bailout
for Wall Street and The Economy
by Presidential Candidate Orion Karl Daley - 09/23/2008

My Fellow Citizens:

Our government and Wall Street had ample to time to correct what is now a dire crisis in our economy. The economy practically crawled at less than 0.6 percent pace in the opening quarter of 2007. The performance was even weaker than the 1.8 percent that was forecast by some economists.

Back then, Federal Reserve Chairman Ben Bernanke, said he didn't believe the economic expansion, then in its sixth year, was in danger of fizzling out. Neither did the Bush administration. Alan Greenspan noted that it was only at 1 out of 3, or 33% chance of a recession.

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But consider that in 2001, the INDU (Dow Jones Index ) was at 10,000+, where in 2007 it was 13,500+; but with a US Dollar that was 25% less value than in 2001.

Back then, a lop sided economy represented by an over inflated stock market that was actually boat anchored to the depreciating US Dollar, could look for some, even more alarming than in Herbert Hoover's time. Consider that we also have not had an economic 'debt:equity' cycle since before 2000 which is necessary for an economy's momentum.

Although I find the Bush Administration, Secretary Henry Paulson, Chairman Ben Bernanke, and even Congress to be more than disingenuous in permitting Wall Street to reach an implosion, and in demonstrating an irresponsible solution for bailing it out; never the less, we do need Wall Street for our economy.

This problem affects all of us. Here are a few immediate examples:

But there is a more cost effective way for Wall Street to correct this. In the following, I propose a means for how Wall Street can cost effectively bail itself out; the trade offs compared to the Bush/Paulson/Bernanke solution to dump this on taxpayers, and how to recover from the Home Mortgage Crisis.

How Wall Street can Cost Effectively Bail Itself Out

Would you agree that if Wall Street could bail itself out, that it would have more creditability ? If you do, can you imagine if the Fed/Treasury allowed a firm to take an indirect loan against their quarterly taxes for this as opposed to what is proposed by Sec. Paulson. If interested , please consider the following . . . . . -

As an alternative to the US Government having to absorb up to $1 Trillion( or $700 billion at best ) in questionable bad paper from Wall Street, I ask you to consider what I see as a viable alternative.

This will, more than likely, than otherwise, prevent the American Tax Payer also from having to absorb this debt, and possibly obviate the need to write callable bonds to foreign investors for it. In the mean time, in my opinion, it allows institutions on Wall Street a liquid path for addressing their liabilities.

Please consider the following: It is about a straw man for an investment vehicle. It is intended for any institution in question that could affect the over all fabric with its counter parties from its own exposure.

As every transaction is supposed to be taxed, as you know, netting is used as a means to average these obligations on a daily bases. This is for billions of US dollars in our banking systems.

Consider , that for a period of time, with government consent, if taxes which are to be paid quarterly to the federal and state governments, are to be invested instead in a non taxable capital markets fund that is managed by the institution. Payment into this fund is to be based on the daily netting amount.

To put this in actual perspective, there is a $60+ trillion credit default swap market that is unregulated. This means that it is not taxed as it would need to be regulated first. Consider that $6 trillion is a mere 10% tax on this which would be ample for use in this example. The bottom line is that Congress needs to regulate this first as representing real income according to Amendment 16 as opposed to withholding on personal wages.

Over time, the non taxable investment fund will build on its own due to its profits in addition to a quarterly based payment by the institution.

When the fund investment reaches four (4) times is original starting value, or the average quarterly netted taxes, then 25% of this will be applied to taxes and 75% maintained in the original fund for capital market management.

At this point, those profits that are made on the fund are to remain in it, and the quarterly tax on the following quarter, for the previous one are to be applied to actual quarterly tax.

Hence, for a period of time, this is in effect, having the government making a non interest based loan for taxes owed while the institution can put the money to work.

The Treasury is not lending tax payer dollars for a bailout , but is allowing the firm latitude for building assets to balance its liabilities.

As this 75% grows it is to replenish the 25% periodically. When the 25% actually exceeds the normal quarterly tax, this overflow can be applied toward firm liabilities, and the original 25% applied toward quarterly tax.

At this point, in switching 180 degrees, the 75% can then be considered an investment on behalf of the government which it can borrow against as is needed.

Would you agree that such a straw man is somewhat more viable than what's currently on the table ?

The trade offs compared to the Bush/Paulson/Bernanke solution

Given a means to do so as is proposed, I see that:

1- There is far less risk than passing it off to the tax payer, regardless if via the Dems or Repubs strategy for doing so.

2A- The Treasury would not have to inherit the obligation to resell bad paper: where investors such as China, Kuwait, Dubai, or Saudi Arabia to invest in these junk bonds,would probably expect for every dollar, to have a return of at least 3 to 4 times. After all, would you buy such bad debt with out good reason ?

2B- By selling bad paper, makes not a $1 trillion, but a $4 trillion liability that each of us will shoulder as tax payers. Further, to invest in such risk, a foreign investor would also expect these bonds to be callable. This means that they can be fully redeemed upon demand before their maturity.

There is no way that these junk bonds can be fully redeemed. The Fed cannot just print more money, and this can only jeopardize what economic solvency we might have some day. This solvency is what true national security is about: the health , safety and welfare of our families.

3- By having Wall Street fix this, it demonstrates that Wall Street can actually make an ethical profit where such profits can be used to back the bad paper.

4- Then the mortgage industry has a actual road to recovery: example -> By the government allowing Wall Street to temporarily reinvest what they normally would pay in quarterly taxes, Wall Street in a matter of a short time can earn actual money to back what was their trillion dollars of bad paper.

5- Wall Street then can be the actual backer of these bonds that are sold by the Government instead of the taxpayer. As Wall Street earns back liquidity, the bonds are paid for.

In summary, if the government does so choose to sell junk bonds, it is Wall Street that can back them in a meaningful way; and it is not a burden on the tax payer who already has $10 trillion of other national debt to deal with: i.e - about $50,000 for each of us, I figure -

The use of these bonds instead can be applied to refinancing mortgages through the government which when restablized can be sold back to Wall Street as a fixed rate debt instrument.

How to recover from the Home Mortgage Crisis

Based on the above - I propose the following for Home Mortgages

1- To Protect against being abused from future unsound Lending Practices, they are to be simply outlawed. The concept of lending is to be by fair practice only. It is to be for the purposes of bettering the American's quality of life and the quality of life the he/she can offer other Americans.

2- To Stabilize and Restructure Variable Rate Mortgages. This is by:

A- Restore the Glass-Steagall Act

B - placing a moratorium on foreclosures that are from the result of teaser mortgage.

C - Provide Social Welfare Bond Coverage to fill in the financing gap.

D- Determine the legitimacy of such loans.

E- To restructure such loans where needed based on the Social Welfare Bonds

F- Perform fair arbitration to recover credit worthiness of consumers of such loans.

G- to prosecute lenders where other more viable loan conditions could have been offered for the existing market.

H- where determined to repay home owners who have been financially exploited by such lending practices.

Thank you for reading this-

Orion Karl Daley
Presidential Candidate for 2008
Author - The New Deal ISBN: 1419670948
for the Strategic Future of our nation
Balanced Party http://unity2008.org
New York, NY, USA -