Market Liquidity Plan

[MikeSofaer]

I propose we fix the economy this way:

1) Create a new bank that lends exclusively short-term commercial paper to going concerns.

2) Exempt them from the deposit limit (you'd have to, they have no deposits)

3) Give them a bucketload of Fed loans so they can re-loan the money.

We'd need to acquire the commercial lending arm of one the banks currently in trouble for other reasons, but that could be done reasonably cheaply.

Who's with me?

[Aszurom]

No taxation of capital gains so long as the profits stay fluid within the market. Taxation applies on withdrawal.

In other words, if you keep your investments in bonds, mutuals, etc and keep rolling the profits back into more of the same, the profits aren't taxed. If you move it out of the market to spend it on tangible goods, tax it on the way out.

I'd prefer zero taxation of captial gains period, but the IRS is addicted to it and won't ever let go.

[Eric T Cheng]

Is it something like this (http://www.crooksandliars.com/2008/09/29/bush-sidesteps-congress-630-billion-to-be-pumped-into-economy-despite-house-bailout-rejection/)?

[AaronSofaer]

What happens when the banks to whom they lend their money all go belly-up due to a huge overload of subprime mortgages going bad?

[Lorini]

What happens when the banks to whom they lend their money all go belly-up due to a huge overload of subprime mortgages going bad?

What he said. Also are you sure that would actually reduce the risk to the American taxpayer?

[MikeSofaer]

You don't lend to lending/investing institutions, you lend to actual producers. Manufacturing, restaurant chains, software development companies. "Main Street" is the term I hear these days.

You don't lend to national banks. You might lend to local banks, if their books are super-clean, and you think they are a good risk (no subprime, etc) as a way to reduce the load on your loan officers.

It reduces the risk to the taxpayer because executive compensation is determined when all the loan originated in a given quarter close. This means that no one near the top gets paid at all if the US loses a dime.

[SteveS]

I propose we fix the economy this way:

1) Create a new bank that lends exclusively short-term commercial paper to going concerns.



If by "going concern" you mean actual businesses that either make stuff or charge for a service, then yes I think this makes more sense than the bailout. Many of the holders of the shitty mortgage based paper will go bankrupt, as they should. The hedge funds, and such, that loaned all the money to buy the bad assets will get screwed, as they should. However, the guy making solar panels, the engineering consulting firm and others with good business plans will have access to lines of credit.

What happens when the banks to whom they lend their money all go belly-up due to a huge overload of subprime mortgages going bad?

This new "credit bank" wouldn't loan to banks. Or at least not to banks with with weak balance sheets. The point would be to offer reasonably priced credit to productive businesses.

This would have to be a short term thing though. Maybe the few years it takes for all the bad debt to finally be realized on balance sheets at its true value. Essentially this plan would poach all the good, safe borrowers and tank the banking industry.

[AaronSofaer]

So what happens if there's a general recession, this entity does better than most banks but still doesn't quite pull a profit, and then the entire top echelon (who beat the competition but still took a loss) gets no money and is really pissed?

[AaronSofaer]

This would have to be a short term thing though. Maybe the few years it takes for all the bad debt to finally be realized on balance sheets at its true value. Essentially this plan would poach all the good, safe borrowers and tank the banking industry.



Then why isn't there a corporation out there that does only this, loan only to good, safe borrowers and tank the banking industry?

[MikeSofaer]

So what happens if there's a general recession, this entity does better than most banks but still doesn't quite pull a profit, and then the entire top echelon (who beat the competition but still took a loss) gets no money and is really pissed?
They would rethink their lending strategies and do better next quarter. Or quit and be replaced.

[MikeSofaer]

Then why isn't there a corporation out there that does only this, loan only to good, safe borrowers and tank the banking industry?
See points 2 and 3 in the OP.

[SteveS]

Then why isn't there a corporation out there that does only this, loan only to good, safe borrowers and tank the banking industry?

The proposed credit bank would be capitalized with taxpayer money. It wouldn't have an obligation to make money, let alone maximize shareholder value. It would need to charge just enough interest to cover operating expenses and the small number of loans that default despite the rigorous screening process. The goal is to break even.

There probably are some smaller banks and credit unions that actually operate somewhat like this. Most, apparently, do not.

[AaronSofaer]

They would rethink their lending strategies and do better next quarter. Or quit and be replaced.


Two things on this note.

First, I think you'd have a huge problem with getting and retaining talent.

Second, I'd point out in this case that the Lending Bank would in fact be beating the market, and that these people would not be people you want being booted... or quitting because, after they beat the market, they didn't get paid.


The proposed credit bank would be capitalized with taxpayer money. It wouldn't have an obligation to make money, let alone maximize shareholder value. It would need to charge just enough interest to cover operating expenses and the small number of loans that default despite the rigorous screening process. The goal is to break even.

There probably are some smaller banks and credit unions that actually operate somewhat like this. Most, apparently, do not.

It would in fact have an obligation to make money, though not necessarily to maximize shareholder value. Otherwise, they don't get paid. For that matter, any corporate charter can state anything it wants as far as goals; it doesn't have to be maximizing shareholder value.


See points 2 and 3 in the OP.

I see you on point 2, though I'm sure someone could think a way around it. As for point three, is there something special about Fed loans as opposed to loans from anywhere else? I'm not talking about specifically right now. I mean once the crisis is over. What makes this Lending Bank special in a way that a private-sector entity can't pull off?


That's the core of my questions on this topic. What precludes, say, Bank of America from having a lending arm that lends only to going concerns?

[TheTrunkDr]

No taxation of capital gains so long as the profits stay fluid within the market. Taxation applies on withdrawal.

In other words, if you keep your investments in bonds, mutuals, etc and keep rolling the profits back into more of the same, the profits aren't taxed. If you move it out of the market to spend it on tangible goods, tax it on the way out.

I'd prefer zero taxation of captial gains period, but the IRS is addicted to it and won't ever let go.
Yes because further tax breaks for the rich when the country is about to go $700 billion in the hole seems like a fantastic idea!

[shift6]

Capital gains aren't just for the rich, boss. But I know that's a favorite fallback point for most here, so I won't rag on you too hard about it.

Start railing about hedge fund managers too, if you want. Because surely they are getting most of the $700B right?

[Enidigm]

Capital gains aren't just for the rich, boss.

True, but.... capital gains are taxed at a much lower rate than other forms of income. I can't remember how bad it is in the oil industry but it's something like x3 higher taxes if you are the owner/operater, vs. being a "shareholder".

The dual issue with capital gains is that it encourages investment, but also encourages hiding income as investments to avoid taxes. Whenever there is a dramatic difference in the tax rates, like there is with capital gains vs. income taxes, it will push people to find ways to exploit the system and avoid paying those taxes that they would have paid otherwise.

[MikeSofaer]

Second, I'd point out in this case that the Lending Bank would in fact be beating the market, and that these people would not be people you want being booted... or quitting because, after they beat the market, they didn't get paid.

I see you on point 2, though I'm sure someone could think a way around it. As for point three, is there something special about Fed loans as opposed to loans from anywhere else? I'm not talking about specifically right now. I mean once the crisis is over. What makes this Lending Bank special in a way that a private-sector entity can't pull off?


The money market is not as risky as the equity market. It would take a general economic collapse to make a good manager actually lose money writing loans to good companies.

Fed money is much cheaper than private money, and you don't need to return 5% on it to be worth their time. It's much more stable, and won't dry up if there's a liquidity crisis.

Bank of America does have a commercial lending arm, but they aren't lending right now, because they are undercapitalized due to the mortgages they overvalued, so they aren't lending, because they don't have as much money as they thought. A bank that only lent Fed money and did not hold assets beyond the close of a quarter would not have that problem.

[Banzai]

It beats the other suggestions I've read about so far.

[Shadarr]

Capital gains aren't just for the rich, boss. But I know that's a favorite fallback point for most here, so I won't rag on you too hard about it.

Maybe not, but eliminating capital gains taxes would disproportionately favour the rich. People who get the majority of their money from capital gains, dividends or interest are rich. Everyone else, even doctors and lawyers and such, get the majority of their income from employment, which means they will not only be paying tax where rich people aren't, but it will be that much more difficult for them to save the money to buy investments that will not be taxed. It will cause the gap between the rich and poor to widen further, because the rich will not be paying any tax and the working class will be paying all the taxes.