No More Bailouts

I have a new white paper out from the Roosevelt Institute's Great Democracy Initiative. The paper, which is co-authored with Lindsay Owens and Ganesh Sitaraman, proposes a standing emergency economic stabilization authority to provide an off-the-shelf immediately available response to common problems that recur in national economic crises.

The motivation for the white paper is that in the past dozen years we've been through two rounds of massive ad hoc bailouts. We shouldn't be doing this on the fly. Instead, we need to have a suite of programs ready to go. Think of this as an "in case of emergency, break glass" approach.

We recognize that an off-the-shelf approach is inherently not tailored to specific crises. That's a feature, not a bug. It's a default setting that has both political benefits and practical benefits. As a political matter, the program's details would be negotiated behind the Rawlsian veil, so lobbying pressures will be less intense. Moreover, the negotiation wouldn't take place under a gun, so there wouldn't be coattails to ride. And having a standing program would force Congress to justify deviations from the program in the future. For example, if Congress wanted to reduce oversight, the deviation would be obvious and raise questions.  

As a practical matter, having an off-the-shelf program means that Congress can respond rapidly, instead of having to reinvent the wheel every crisis. That's especially important if circumstances make it difficult for Congress to convene.  

The program we propose has four components: big business, small business, payment systems, and automatic stabilizers. I suspect that the big business program and perhaps the payment systems program will be of the most interest to readers of this blog.

For big businesses, we propose an off-the-shelf bankruptcy-based recapitalization system for businesses of uncertain solvency that are not eligible for support under section 13(3) of the Federal Reserve Act. Basically, we copy the NBC's proposed Chapter 16 and address only financial debt:  common equity is wiped out, bonds are covered to new common on a pro rata basis, and the federal government takes a preferred equity position on a dollar-to-dollar basis with the conversion. If more funding is required, it would be done via a statutory priming lien. The preferred stock would come with a mandatory set of covenants that would give the preferred substantial control without involving the preferred in day-to-day management of the debtor.  The point is that this isn't a bailout--there's no free money here. Shareholders will get wiped out and bondholders converted and lenders possibly primed. Much more detail is available in the paper.