Freeze the Status Quo & Build the Right Solution vs Slow Response with No Support

We might just call it the European approach – freeze the status quo by guaranteeing your inter-bank loans until you can implement longer-term regulations and financial solutions versus the American approach – leave the markets completely alone while you design a cumbersome and tedious structure to invest expensive capital into institutions that are struggling enough with cash flow and then implement a confusing set of parameters that local banks simply do not understand.

Remember how markets tell you exactly how the financial community feels about any particular financial issue by voting with buying or selling stocks. Guess which plan the markets liked and which one they have rejected. The European approach was announced over the weekend, and the global stock markets exploded, with the Dow rising almost 1,000 points into a day. By the time the complex American plan was released and digested by the financial experts, the markets began trading down, falling globally.

The financial press had a field day analyzing all of the obvious defects of the Treasury’s Capital Purchase Program, mostly pointing out how long it would be for anyone to see any real market changes, assuming struggling local banks even accepted the structure at all. So many economists were now challenging the viability of the very theory that the Treasury bank buy-back plan was based on: trickle-down economics, where money placed into the top of the economic food chain (through lower taxes or supporting the big institutions) is supposed to trickle down to the consumers. Pretty much the kindest description of the profoundly flawed Paulson plan was an Associated Press headline reproduced on AOL: "Federal bank buy-in no economic quick-fix."

The above AP story provided an apt consumer-based analysis of a story that had been reviewed all day in the more financial-industry-directed press: “The pain will almost certainly drag on as vanishing jobs, shrinking paychecks and nest eggs, and slumping home values continue to force millions of Americans to pull back.

“Sales at the nation's retailers are expected to drop in September even as they get a break from record-high energy prices. Uncertainty about the economy — and their own financial fortunes — probably will force consumers and businesses alike to hunker down further, spelling more problems for the already troubled economy.”

OK, the markets have rejected this plan, the financial press is tearing it apart, and there isn't a slight hint of a Treasury Department strategy that would work. Congress, on a recess, was talking about lots of “plans” to fix the mess. Both Presidential candidates seemed to have joined the chorus of rejection for what the Treasury had proposed.

My choice – well you've read it here so many times, but hey – a version of the European plan tailored for the specific American differences: 1. place a moratorium of residential foreclosures to stop the disintegrating real estate market while we figure out which are the good loans and which were procured through fraud or cannot be sustained under any view, and then set meaningful and viable interest rate caps (restructuring values where necessary) and 2. place a short-term federal guarantee on receivable bank financing (applying the same loan standards that have always applied to such loans incurred in the ordinary course of business) to allow payrolls to be funded immediately while we determine a longer-term solution to bank lending liquidity. And then create oversight and regulations to prevent a disaster like this from ever happening again. Start with the derivatives market.

Or we can let the Treasury continue driving this railroad train down a hill off the tracks!

I’m Peter Dekom, and I approve this message.