Thursday, September 18, 2008

Senator Schumer Proposes One Of the Dumbest Ideas Yet

From Bloomberg:

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are considering a new plan to address the credit crisis, said Senator Charles Schumer, who proposed an agency to pump capital into troubled banks.

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''

Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.

Treasury spokeswoman Michele Davis didn't immediately respond to a request for comment and Fed spokeswoman Michelle Smith declined to comment.

Why is this a dumb idea? Let me count the ways.

1.) Where is the money for this going to come from? I've detailed the proposed spending plans we've seen so far. They total $900 billion. Now we're going to pump more money into the system from some as yet unknown source.

2.) Just what will the government do with these interests? They're going to wind up the majority shareholder in some of these institutions -- and a minor big holder in others. Who will decide the government's policy?

3.) What is the criteria for investing in a company? If ever there was going to be a highly politicized process this is it. I can see it now ... "Senator from big important district gets huge cash infusion not because it's a good investment but because the Senator is in a close reelection bid and needs votes.

4.) Will the government ever get out of these companies? Will there be a time limit?

5.) Will there be a time limit for this entity's duration? Will it go on forever?

6.) Will the government become intimately involved with the company's internal deliberations and policy? Will Congressmen sit on various boards?

I could go on, but you get the idea. This is a disaster waiting to happen.