Yesterday, in a surprising turn of events, the House of Representatives turned down the proposed $700 billion bank rescue plan. This in turn, caused the Dow Jones market to go into free-fall, accumulating the largest one-day drop in a couple-odd decades. Markets around the world reacted, mostly in sympathy, with the U.S. market, racking up impressive losses as well.

But just one day after the meltdown, stocks seem to be bouncing back as some investors see the one-day fall as a bargain sale on stocks. Could this mean that Congress was actually ‘right’ in rejecting the bill?

Many congressmen on both sides of the aisle were against the bailout, mainly because of the vocal majority of constituents that let their representatives know they were against bailing out the Wall Street fat cats that had for so long profited at the expense of Main Street. Whether it’s the Democratic ‘not enough oversight and restrictions on spending‘ point of view or the Republican ‘belief in a free market approach‘, it was enough to torpedo the proposed spending bill,.. for the moment.

How I Would Fix the Whole Thing

That got me thinking about some of the provisions of the bill, some I like and others I don’t.

I don’t like the provision for the government assuming the bad debts, even if there’s a chance that we (the tax payers) would ‘possibly’ make a profit off it. Smart people on Wall Street are trying to give these white elephants away, and Congress is right in looking at this with a jaundiced eye. If they were profitable, the banks would hang on to them. As-is, they’re looking for a sucker to pawn them off of, and the government looks like a nice FAT sucker.

I do like some of the provisions that I’ve heard about, but don’t know whether they got into the final writing of the bill.

Oversight – The Democrats want some more oversight, especially for those banks taking advantage of the bailout. They are the ones in particular that probably should‘ have additional oversight, since they’re the ones that have gotten themselves into trouble.

Government-backed Mortgage Insurance – The government would allow those banks that sold ‘marginal’ mortgages to purchase government insurance, encouraging them to keep these loans and service them, rather than foreclosing and selling/writing off the bad debt. This would help ’some’ of the mortgage holders who are right on the edge of foreclosure.

Some things that should have been in the bill, but weren’t;

Expand Bankruptcy Judges Powers – Allow bankruptcy judges to re-negotiate mortgage terms for those people declaring bankruptcy primarily because of an increase in their mortgage. This is WILDLY unpopular with banks, but is the PRIMARY reason that most banks are in the straits they’re in. Adjustable Rate Mortgages (ARM’s) adjusting upwards and ‘whopping’ the mortgage holders for hundreds more dollars a month. I’m not saying the homeowners shouldn’t have seen this coming, but if they are able to afford the pre-increased amount, have been diligent at paying, and are in foreclosure PRIMARILY because of the increase, why not give them a break.

Increase FDIC limits – I heard this one discussed on NPR (props to them), but liked the idea so much I’m including it here. Most people don’t have over $100,000 just lying around, but many small businesses do. They have this in accounts ready to pay quarterly taxes and/or payroll. So for each bank that goes under, small business owners start worrying whether they’ll make payroll or not. The proposal is to increase the FDIC guarantee to $250,000 per account, to cover these small business owners, and some more affluent investors. Puts a little more confidence into deposits, even if the bank goes under. The recent WaMu run on the bank by depositors might have been averted if this had been in place.

Guarantee Bank-to-Bank Loans – This one is all mine though. One of the current MAJOR problems is that the credit market is at a standstill. Banks are afraid to lend to each other, for fear that they won’t be paid back. Current inter-bank lending rates hover around 7%, where they would normally be around 2-3%. No one wants to lend to anyone else unless they have PERFECT books (no bank does nowadays) or at a comparatively ludicrous rate of exchange. My proposal is that the government provide inter-bank loan insurance to cover amounts at or below 4.5% interest. That means that if the bank A loans money to bank B at 6% interest, and bank B goes under, the government would cover the loan, up to the 4.5% level. Bank A would lose 1.5% ‘extra’ income, but would still have their initial amounts covered, along with 4.5% profit. This percentage could additionally be tied to the Fed lending rate in some way. This would encourage banks to get back to lending each other money at rates that could support them, while getting the credit flow back into circulation.

None of these would require any expenditures of money, just a government guarantee, should things really go bad.

We Have Nothing to Fear, but Fear Itself

The problem today isn’t so much with the banking industry, as there’s still quite a few strong banks (and some banks getting stronger by buying up the pieces of weaker banks) but in the lack of ‘Trust’ in the financial sector right now. Too many ‘big deals’ have been made and lots of complex ‘derivatives investments’ have been produced. The investor on Main Street is seeing these wheeling’s and dealings, and since they can’t figure out what it means, is mistrustful of the whole process.

Apparently, rightly so.

Do you have any ideas on fixing the banking system?? Leave us a comment and let us know.