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Current time:0:00Total duration:12:22

Video transcript

I tried recording this possible solution to the bailout video just now but apparently the the sound went bad so I just restarted my computer so hopefully I won't turn into slow-motion man again well anyway the whole discussion so far has been focused on how did the credit crisis get started and why the current bailout proposal 1 is wrong from just from a moral hazard and fairness point of view and why it probably won't work even even to begin with so so you know why even go into it and and some of you said well you know what could be a solution and I've argued a little bit in the wealth destruction video that you really can't legislate against reality that you kind of have to let things correct you cannot create wealth to just by passing bills all you can kind of do is shuffle around who takes the losses but in one of the videos I I argued and that you know if the government was serious about helping Main Street about loans to Main Street why don't they lend directly to Main Street and I kind of said it a little bit flippantly that if that was their intention that's what they should do with the 700 billion dollars and I got a letter from an email from a friend from business school very intelligent fellow who I respect very much and he essentially is wrecked he has a solution that I think is essentially that loan directly to Main Street don't bail out these people who have already acted extremely responsibly irresponsibly and essentially write them checks from American taxpayers and his his discussion his his suggestion is instead of buying worthless assets why not create new banks fully capitalized by the government but you might not even have to capitalize them and let those banks lend directly to Main Street and he makes some very interesting points he says let me let me make sure I can fit all of this I don't know if you can read it what this tall fit but he makes the interesting point seven hundred billion dollars of capital this is exact this is his email that he sent to me with seven hundred billion dollars of equity this is more book equity and therefore more lending power than Bank of America JP Morgan Citigroup Washington Mutual Wachovia Goldman Sachs and Morgan Stanley combined so combined these institutions which are really the pillars of our financial they represent 619 billion dollars of book equity and remember this is what this is their book equity this is what they say is the book value of their assets but we've already learned that they're probably being being overstated and that's why we have to go and buy them at prices more than what they're worth but this 700 just to get an idea of how large of a dollar amount this is this 700 billion is more than what these banks say they're worth it's probably several multiples of what they really are worth some of these banks probably aren't worth anything and as it points out the new bank would have no prior committed loans so the incremental amount of lending available would be much larger which means you are not lending into a black hole when you when you lend money or you essentially give money to one of these banks that have all of these other bad liabilities your money is essentially just being poured into a bat black hole and there's no assurance that that bank is going to go and then lend that money to other people and go to Main Street but if you inject it into a bank with a completely pristine balance sheet a new Bank you could call it you know the bank of Washington the bank of Jefferson and I would actually recommend having multiple banks just so you have competition and you don't have that too-big-to-fail problem but these banks they would have a pristine balance sheets and they would go out and make loans and they would go out and make loans wherever it is most prudent and he says you know this accomplishes the goal of injecting lending capital into the system without creating the moral hazard problem and at the end of a few years the government will probably be able to IPO sell the bank for more than 1 Times Book value which will include the original 700 billion generating a substantial profit to taxpayer exactly in fact they could either do that the bet the government could own it and then try to IPO it in five years or so like like Todd suggests or another option is maybe each of these banks maybe the bank takes 700 billion and creates 10 banks that each have 70 billion in initial equity capital and maybe the government issues 300 million shares of each of those banks and every American man woman and child gets one share of each of those banks I think they would have a very powerful political statement it actually would make economic sense all of a sudden you would have the American people are now the owners of the banking system instead of this concentrated wealth that's really for over the past 150 years in the old banking system and then you know he goes on to point out some other things sure the more current banks would fail probably quicker and and we all know that's a good thing what happened in Japan what happened in Japan is we kept infusing capital into what we didn't the Japanese government kept infusing or either did it themselves or coaxed other people to infuse capital into banks that were essentially zombie banks that were insolvent and just slowed down it had the slowdown the downfall and essentially led to their lost decades so he says you know more banks would fail but many of them probably deserved to fail in the financial system would be preserved I agree with them completely if the new bank wants to lend new money to new borrowers it can or if it thinks it will make more money buying up old loans like the CDOs or the residential mortgage-backed securities at a deep discount it can do this too but it will be making a clear economic profit decision and I'd add just so that we make sure that the management of these of these new entities so that they are aligned with profit-making as opposed to bailing out their own previous past bad decisions or bailing out the people who they used to work with I would try to not put these banks in New York maybe you put them in Detroit and New Orleans and Stockton California which is a foreclosure capital of the world of the country put them in places that are separate from Wall Street hire very intelligent people who are have some distance from what has happened the last five six years in Michigan I'll tell you there are tons and tons of very competent very intelligent managers who understand these issues deeply in this country unfortunately a lot of them haven't been heads of banks lately and they would be happy to work for something less than twenty million dollars a year in fact I think many of them would do it out of patriotic duty but you could pay them a hundred thousand dollars a year and then you could say you know what you as the the new employees of these new American banks that are owned by the American people and they can be traded on an exchange let's essentially immediately privatize it's never owned by the government it's immediately owned by the private sector by the American people not by the government when I say American people it's literally owned by private individuals not by the government but you can actually create an incentive structure that whatever the equity value of your company is in five years out you all as the employees share 1% of the of the of the benefit and access actually a huge number that actually might be too much but you will be able to hire excellent managers especially considering how many people are getting laid off right now very intelligent people because of bad risky decisions made by others but then he finishes up I recognized this will be less politically popular among banking lobbyists but see it as a much better way to one protect the financial system I agree with him completely to minimize the risk maximize the reward to the US government and he welcomes any comments criticisms and I think it's interesting he started off the the the idea he says the problem is this sort of plan would be political suicide with key financial donors to political campaigns and that's true unfortunately this this I think this is a good idea but I think the current old banking system has a much more receptive ear of our of our government unfortunately than I or Todd or frankly the American people seem to have right now but anyway let's just you know I was kind of parsing Todd's email let's at me let me actually draw out a plan of what this would be so you take 700 billion dollars and let me write that out 700 a thousand that's million that's a billion you take that 700 billion and you I don't know you put it I think the more banks the better you want competition you don't want to have this too big to fail problem so you take that 700 billion and the first time I record this video I said you put it in 10 banks but I don't know let's put it in if you put it let's see if you 700 divided by 10 banks would be seventy billion each if you do seven if you do what if you do 70 banks you would have 10 billion each so let's do that put it in 70 different banks 70 different banks or maybe do it in 50 different banks in one bank for each state of the country 70 different banks I mean that sounds crazy but when you think about what the government was originally go I should let's do 50 banks I like the sound of that one bank in in every state right I think and and it they're not all concentrated in in New York and they're not you know so you have you you get fresh thought fresh blood in them and they actually might that they might actually hire people that that are getting laid off in the manufacturing sector or the or the real estate sector or whatever you take 50 different banks you capitalize them each with what 50 goes into 700 billion one point what 14 times right 14 let's see 15 right goes 14 times so you capitalized them each with 14 billion dollars so their balance sheets are going to look like this equity this is each Bank 14 billion of original of initial equity and this is going they're going to have 300 million shares million shares one for every American and if they don't like the holding shares the bank they can sell them all all IPO in the exchanges and then these will be member banks of the Fed and so they can they can they'll be regulated but they can lever up ten to one so they can let's say with 14 billion dollars of assets each of these banks can control one hundred with fourteen billion of equity each of these banks can control one hundred forty billion of assets which essentially that's 140 billion that they can lend out to the world if they see good returns good economic investment in Main Street they'll do it there if they think that some of the existing banks are actually good credit risks that they could lend maybe to JP Morgan or Bank of America they'll do it maybe they won't do it at six percent like the Fed wants them to or at two percent or whatever they'll say it's a little risky or maybe I'll do it at ten or twelve percent and this is another side note I'd like to say who it seems like the Fed is getting frustrated that it wants to dictate that banks have to lend to each other two percent but they're willing to only lend to each other at six percent and so it's losing control over that that notion of what banks lend to each other at six percent is still low if I had to lend money to someone who could go under next week I want at least twelve or fifteen percent and I don't think that's a crazy interest rate that's what people were paying in the early 80s and they weren't talking about financial Armageddon back then but anyway each of these banks would have 140 billion in assets and then I don't know how much in liability one forty minus 14 is 124 billion in liabilities and they would be very easy to raise to borrow money these banks would have an easy time borrowing money from a bunch of different people and why is that well one they have completely pristine balance sheets no one worries about what kind of stinky things they have on there on this side because it's all new investments and then if the if the government really wants to make sure that these banks get off the ground running they can put a they can put make them a temporary government a backstop on it so essentially they could be government-sponsored enterprises but not indefinitely we don't want a Fannie Mae Freddie Mac again you could say five-year government backstop five-year government backstop which essentially says if you lend to these banks over the next five years anyone lending to these banks over the next five years if for whatever reason these banks were to go under you will be made whole so there's literally no risk to investing in these banks and frankly frankly if just this five year government banks top government backstop on these banks I think will encourage people to invest equity in these banks and the government might not even have to put these 14 billion in each bank but anyway I've run out of time I'll continue this in the next video