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BK has a plan:
The need for urgent action was based on two assumptions that are not necessarily true.The first was that Congress had to act -- now! -- or the whole system would collapse. But the assertion that the entire financial system is "frozen" is a gross overstatement. The parts of the system that are clogged up with bad mortgage paper are indeed on life support. But the rest of the system is functioning. Businesses are getting loans. Citizens are cashing checks. Homebuyers are taking out mortgages. Investors are buying and selling stocks. If another big bank goes down in the next three weeks, Paulson and Bernanke will just do another ad hoc rescue, as they have done for a year. Better to do this general overhaul right than to do it in great haste.The second assumption is that Congress is about to adjourn for the election -- it's now or never. But it turns out that the senior members of the key house and senate committees of both parties all have safe seats.So here is the Kuttner plan, as a wiser alternative to the Paulson plan:Congress appoints a small bipartisan legislative committee, made up of the senior members of the House Financial Services Committee and Senate Banking Committee and a few other respected and expert legislators. The rest of Congress adjourns and goes home to campaign. The special committee interviews experts, holds hearings, and reports back with draft legislation on Tuesday, October 14, the day after Columbus Day. Congress comes back into emergency session and acts by the end of the week.Seems sensible. He also suggests that lawmakers take a look at the (highly successful) model of the Federal Deposit Insurance Corporation. "Paulson," he says, "has given every large and unregulated financial institution in America an implicit government guarantee. The FDIC, by contrast, gives explicit guarantees, but these guarantees are conditioned on regular examinations of their investment policies, their management, and the quality of their assets. When an FDIC-insured bank fails because of dumb policies, the government doesn't just buy its bad paper and give management another chance; the FDIC often takes it over and cleans it up." That distinction between "implicit" and "explicit" is important. If were going to be saving banks that fail, we should say so (market confidence and all that), and say clearly how we're going to be doing it and what will be required of the rescued institutions.