Tuesday, September 30, 2008

A Real Proposal for Solving the Crisis

By the time you read this the markets will likely be under the assumption that $700 billion of your money is going to be handed over to the private sector. However, I have a proposals that could address this crisis immediately.

As I've said before the problem is not access to credit right now - it's liquidity. Many people today started down the right path by suggesting an increase in FDIC insurance limits (currently $100,000). In theory, this might draw some additional capital into the system, but frankly if I'm worried about losing money due to bank failures I would just put $95,000 in each of 10 separate accounts at 10 different banks, 5 of which I'd actually tell my wife about :)

However, the reason I won't move money out of money markets into the banking system is because the returns are so pathetic. Banks need money (deposits) and in a nation dictated by capitalist rules like supply and demand, they way to gain deposits is by paying an above average market rate.

If banks were to offer one year CD's paying say 7% and a national campaign was launched to encourage purchase of CD's as a patriotic act (like the old War bond commercials) money would flood the banking system (and while we're at it let's bump the insurance on these CD's up to $500,000). Yes, you say, but banks would get killed paying 7% interest for a year.

Here's where the government can play a role - the government could make up the difference between the market rate (about 4.5%) and the above market rate (in this case 2.5%). If the US citizens deposited a whopping $1 Trillion in 1 year CD's, the cost to the government would be $25 billion. The banking system would be saved, you and I would earn a decent return, capitalism can flourish again and American can regain it's status as a global financial power thanks to some creative thinking.

Unfortunately, we're going to proceed down the path of a bailout for the banks that has no guarantee of increasing liquidity and will likely lead to lower confidence in our US corporations (see the post on mark to market).

Oh, by the way, remember what caused all of this mess --- housing? Well, the numbers out yesterday continued to show substantial price weakness across the country. While the rate of decline slowed a little in July (the data lags by two months) there is no sign of a bottom.

"Little positive news can be found when cities like Las Vegas and Phoenix report annual declines as large as -29.9% and -29.3%, respectively, and all 20 cities are still in negative territory on a year-over-year basis. The Sunbelt continues to be the story, with the seven cities that basically represent that area reporting annual declines roughly between 20 and 30%. While some cities did show some marginal improvement over last month's data, there is still very little evidence of any particular region experiencing an absolute turnaround."

Media Appearance

I had the opportunity to join Jeff Cole again via phone on WWNY's morning show. I was a little thrown by some feedback on my phone early on so excuse my deer in the headlights reaction to the first question.



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