Bailout

Our New America colleague Michael Lind suggests a novel way to revive America's savings culture in today's New York Times. He proposes that we bring back one of the old ways that people saved, which was through a postal savings bank.

Congress created such a system in 1910 and it thrived for decades as a place where small savers could store up their cash. The advent of FDIC insurance shored up the instability of the banking system and postal accounts fell out of favor and then out of commssion. But Lind argues that it is time we rekindle this flame. Small savers remain unpopular among most banks and millions of Americans do not own a basic transaction account, which means they have to pay more for everyday financial services.

Given the financial crisis, we know that we will need to realign our consumption habits to save more. We will need to do so for small and middle-sized savers alike. What we lack now is the infrastructure to support a savings revival. Perhaps the post office, still a ubiquitous presence in communities throughout the country, can be part of the solution.

Friday morning, October 3, 2008, the New America Foundation held an informal meeting of staff and interested others who listened to a presentation by Ellen Seidman, Financial Policy Services Director in the Asset Building Program. Ellen took about 25 minutes to shed a great deal of light on the roots of the current financial crisis; a historical perspective on the nation's current predicament; the strengths and weaknesses of the "rescue plan" passed today by Congress and signed into law by President Bush.

Ellen was also kind enough to take some questions from the audience and to allow the entire affair to be recorded for posterity. Since not everyone could be there, we wanted to take this opportunity to share some highlights of Ellen's presentation. Later, we'll post the entire event, but for now, here are some key segments.

First, Ellen talked about the roots of the current crisis. One of the most interesting items here is Ellen's perspective that the United States is currently facing three economic crises--one in the general state of the economy, one in liquidity, and the third in the credit markets.

The LA Times reports: In a letter to the Treasury Secretary, Gov. Schwarzenegger says the state may soon run out of cash without a $7 billion loan.

As Congress and others engage in the entirely necessary efforts to get Secretary Paulson and Chairman Bernanke to (i) explain why what they're proposing is necessary--beyond a promise of Armageddon if Congress doesn't follow, quickly, like lemmings; (ii) build some serious accountability and oversight into any program; (iii) ensure the United States taxpayers get significant upside for whatever they spend; and (iv) maximize the likelihood that whatever is done to stabilize markets not only actually accomplishes that result but also stabilizes affected households (both homeowners and renters) and communities, I get the awful feeling that $700 billion is starting to feel like play money.  It isn't.  No one suddenly gave us $700 billion to spend, no matter how eager the Secretary is to make it sound that way.  It will come from new borrowing, which we and our children will have to pay back, with ever more interest.

To piggyback off my colleague David’s thoughts on older Americans and the mortgage mess, I believe the new AARP study provides an impetus for a national conversation about automatic savings as well as flexible savings.

The study indicates that the foreclosure rate for those aged 50 and older whose mortgage exceeds their home value is twofold the national average. I’ll leave it to my more seasoned and brilliant colleagues to muse about and craft solutions that help those in trouble now, but I do maintain that our long-term asset-building goals should remain at the fore. While the importance of fixing our regulatory structure and re-thinking the way we do business in the housing arena cannot be overstated, I feel that we can focus on proactive solutions that allow for greater financial stability in those age groups that are, unfortunately, disproportionately affected by this calamity.

Last night, I was one among 15 progressive bloggers invited to an informal and intimate meeting with President Bill Clinton to discuss the 2008 Clinton Global Initiative, the annual massive convening of world leaders, celebs, corporate executives and progressive NGO activists to make commitments to solve some of the world’s greatest challenges. Told the meeting would last 30 minutes and to limit our questions (“if there is time for any”) to this year’s CGI commitment areas, I wasn’t expecting much more than fluffy rhetoric and quick sound bites on each of this year’s issues -- education, energy and climate change, global health and poverty alleviation.  But, President Clinton took his first question early -- “Will the financial turmoil in the United States be a distraction from efforts to advance CGI commitments?” Indeed.  This question ended up dominating an hour-long discussion of the causes and effects of the current financial crisis, and what needs to be done about it. 

Regional banks are finding it difficult to raise enough capital to fend off fears over their poor financial health. A recent report from Goldman Sachs claims banks will need $65bn in addition to the $120bn they already raised to shore up their balance sheets. Most national and global banks continue to find investors, but regional banks are struggling to secure financing and investors are convinced they are too small to receive a government bailout. Last week, IndyMac's failure will likely cost the FDIC almost 8 billion dollars.

Snapshot asks, is the FDIC's $53bn fund adequate to handle a run on regional banks?