Friday, February 11, 2011

Bailout or Bypass

Bailout or Bypass

By Tom Stern, CEO,

What is Doing The Right Thing for Americans? Is it Bailout, Bypass or a little of both?

Our leaders are working hard //-> and trying to get us out of this mess. They are not sure what will and will not work, so they are throwing everything, including the kitchen sink, at the problems with great risk and cost. Bottom line: America is struggling to reinvent itself and like America has always done, we will come out stronger and better.

Let’s briefly explore what happened. We were playing a type of Ponzi scheme on ourselves – now we have to deal with the aftermath. But how?

Let’s realistically look at the problem. The cost of fuel at $147 a barrel was draining wealth and liquidity out of our economy. This was a blessing in disguise - it shed a light on the lack of integrity in back room deals – we will learn more in time. It has us on alert; better now then later. In essence, the almost extra trillion dollars we spent on oil sucked the money (our economical life blood) out of the economy, almost caused heart failure, and did, in fact, cause blood clots (institutions not willing to lend) throughout our system.

Since we have rarely been in such dire straits, let’s look at other experiences that could be instructive. Our circulatory and highway systems are good analogies from which to learn. When there is narrowing of the arteries around the heart, the system starts to build bypass systems to circumvent the blockages. We also have the example of how we react to a traffic accident; we first bring in medical crews and wreckers to clear the immediate blockages. How should we learn from these two examples?

We also learned that when giving troubled banks money, they have a choice: who do they let drown - themselves or their clients? The answer was obvious, but we didn’t see better solutions. Thus the credit crunch continued.

Here is what I believe is a healthier solution:

We should set up “financial bypasses” around the banks and other credit institutions. That is, we should set up reservoirs of government-provided funds which banks would use solely for the specific purpose of providing credit – loans and mortgages – to American people and businesses. These pools of bypass funds would not be contaminated or corrupted by the “toxic assets” represented by non-performing debts. We would use the infrastructure of the banks as a mechanism to lend money and provide mortgages to responsible borrowers. (The bypass money would not be used to shore up banks’ balance sheets – we will deal with that later in this article.) When credit becomes available, our industries, commerce, and jobs will revive. At the same time, we will learn what went wrong and rebuild for a 21st century world economy.

The bypass solution addresses the need for banks to be motivated to lend money, because the profit will be reflected on the “bypass” balance sheets. With healthy “bypass” balance sheets, banks will not hesitate lending each other bypass money and will not be worried that they will not get it back.

As things start returning to normal, which they will, due to more liquidity and confidence, this in turn will stabilize real estate. With real estate stabilized, the toxic assets will have reasonable value. The banks could then start to sell their assets and shore up either their balance sheets or the bypass ones with actual cash.

Then, we will be able to truly gauge our real toxic assets and see what the true damage is.

This is obviously a short outline to start with that, I believe, makes sense and reduces potential damage and risks. We will have a functioning system that we will reinvent, and which at the same time will continue to thrive as we go through the process.

Just to add levity. A cardiologist and mechanic are bragging about how good they are. The cardiologist brags how he could bring a heart back to health and have his patient run five miles. The mechanic states how he could take an engine apart and make the car run better then new. The Cardiologist ponders and says that is impressive, but could you do it while the engine is running?

This is an opportunity to learn and grow. This is an opportunity to be sensitive to each other’s needs – let’s Do The Right Thing; let’s treat each other the way we would want to be treated and get this country rolling again.

work hard.......... //-> Working hard – Let’s acknowledge that we are not perfect and most of them will make mistakes but we have to encourage them to do the right thing. When we criticize we should all do it with good intentions to figure out what the right thing is for America.