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September 29, 2008

Now What?

The House defeat of the bailout bill was good for both our democracy and our economy. Even the prospect of Wall Street holding a gun to its own collective head and threatening to pull the trigger - even the prospect of not getting the next round of campaign contributions – was not enough to make a majority of the representatives, every one of whom is up for reelection, vote against the wishes of the vast majority of their constituents. Special appreciation to Vermont Democratic Congressman Peter Welch who has no significant re-election opposition but voted his conscience against the bill.

I just bought some stock on the news after the Dow's latest swoon. Not that I think I can pick an absolute market bottom and certainly not that we're out of the economic woods but I would've sold had the bailout passed because of the damage I feared it would do the economy.

So would should our government do and not do? Here are a few suggestions:

  1. Don't raise the per account limit on FDIC insurance more than to $250,000. I would've been for this a little while ago; but, If money flow is drying up from the central banks, it's better that those who want the security of FDIC insurance spread their money over many local and regional banks so that they'll have money to lend; but some increase is justified to balance the temporary insurance of money funds and because this limit hasn't been raised in a long time.
  2. Do make sure there is enough standby money for the FDIC to handle a large number of bank failures and assure people that there'll be no need for a run on banks.
  3. Consider buying unsold houses in hard hit areas to resettle people from flood-prone areas who've lost their homes. No financial purpose in building more housing inventory now.
  4. Do take the money that is flowing into Federal bonds at low interest rates and invest it as quickly as possible in infrastructure projects including rebuilding the power grid, fixing highways and bridges and waterways, and broadband for rural areas (OK, I'm a special interest, too).
  5. Share some of that Federal bounty with the states either in the form of municipal bond insurance or grants so that the states can build infrastructure as well. The cost of borrowing for local governments has gone up alarmingly and it would be very damaging to have them halt instead of increasing infrastructure projects.
  6. Backstop student loans. We do need more training; we don't need more people entering the workforce in the short-term.
  7. Don't bail out the auto manufacturers either but do invest in basic research on batteries, plan for the disposal of batteries, and consider resource investment for pumping hydrogen, natural gas, or electricity to the next generation of refueling stations.
  8. Quickly replace the Federal fleet of gasoline vehicles with anything that uses less or preferably no oil-based fuel. This step both saves manufacturing job and helps solve the chicken-and-egg problem of not having an infrastructure for alternative fuel vehicles because there aren't enough alternative fuel vehicles for the infrastructure to serve.
  9. Don't try protectionism – the Smoot-Hawley is widely believed to have worsened the great depression.
  10. Don't revive the Wall Street portion of the bailout.
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