Sep 30 2008
2 Changes and the Emergency Economic Stabilization Act of 2008 Will Easily Pass Congress
2 Changes and “The Emergency Economic Stabilization Act of 2008” Will Easily Pass Congress
One of the largest constituency issues lawmakers were faced with was there wasn’t enough offered to the taxpayer/consumer in exchange for bailing out the financial system.
1. Add bankruptcy protection back into the equation for borrowers.
I noted on September 25th in my posting; “Creditors Shot Themselves in the Foot and Congress Handed Them the Gun“, that with the tightening of bankruptcy laws under the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”, it became more appealing to walk away from poorly contrived mortgages in down economic times.
This is a prime example where government regulatory changes caused collateral damage to our financial structure. Damage to our financial system was introduced by this law because it helped reduce free market self governance by lenders.
This move would make potential debtors more likely to borrow again and creditors less likely to make bad loans.
This action alone would probably make the bill sail through Congress as early as Thursday, October 2, 2008. A complete repeal of that law would probably be our best bet right now.
2. Raise FDIC deposit insurance to $200,000 - $250,000.
Both Obama and McCain are calling for the FDIC to raise depositor insurance protection on savings accounts to $250,000. Even though the $100,000 mark is antiquated by inflation history, it may be difficult under current FDIC liquidity and reserve standards in these financial times:
To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:
Well capitalized: 10% or higher
Adequately capitalized: 8% or higher
Undercapitalized: less than 8%
Significantly undercapitalized: less than 6%
Critically undercapitalized: less than 2%
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank.
Doubling FDIC Insurance guarantees for depositors will immediately double the FDIC liquidity and reserve requirements on member banks.
This action is needed to help build a more sound capital structure for our banking system, encourage savings, support small business and help prevent bank runs, but it would also immediately tie up a great deal of liquidity banks may or may not have on hand.
It may be that the best choice is to phase FDIC insurance increases in over a designated time period, instead of all at once.
Engineer2
