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An Overlooked Solution: Some lessons from Sweden September 23, 2008

Posted by The Armchair Economist in Business, Commentary, Economics.
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It seems as if Paulson’s plans aren’t getting through Capitol Hill as easily as easily as Paulson and the Bush administration would like it to. Rather than blindly react to a calamity (as they did after 9/11), cooler heads are prevailing. In a way, the quick announcement by the Fed for a ‘Bailout’ last Friday fulfilled its main goal.. of stabilizing a market that was running on fear. While the Senate Banking Committee is busy fleshing out the details of the bailout, I wonder why no one has brought up a strategy that was utilized by the Swedish Government in the 1990s to stabilize their own economy after a similar housing bust.

Rather than buying bad loans from the banks to strengthen the bank’s balance sheets, the government forced the banks to mark their loans to market prices, and then offered capital infusions in return for warrants (which gives the government the right to purchase stock at a set price). This solution makes the banks and their investors responsible for their actions, minimizes the burden on taxpayers, and strengthens the banks with exactly what the need: capital.

If Paulson (who is a product of Wall Street as the Chairman and CEO of Goldman Sachs for many years) isn’t even considering this option, one has to question whose interest he is serving. Consider this little tidbit: the costs of managing a $700billion dollar portfolio isn’t small, Paulson already stated that the job will be dolled out to another company to manage.. Can you picture executives licking their chops in anticipation of these types of fees?

Additionally: Goldman Sachs announced that it raised $7.5b in new capital.. looks like they are playing it smart. As the Senate Banking Committee spends its time analyzing the bailout, GS is wisely protecting themselves from market reaction to the announcement of the details of the bailout.

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Comments»

1. DT - September 24, 2008

I have to say that I’m surprised but pleased that congress is pushing back.

I think Paulson’s comments have made it fairly clear that he’s simply considering what plan would the banks freely agree to (ie. one that profits themselves and their execs) without really considering the interests of interests of the people he’s _supposed_ to represent (the rest of the nation).

btw I also wrote to my representatives and senators. I learned they’re all women. 😛


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