Rob Johnson and George Soros: A Better Bailout Was Possible: "A critical opportunity was missed when the burden of post-crisis adjustment was tilted heavily in favor of creditors relative to debtors.... When President Barack Obama’s administration arrived, one of us (Soros) repeatedly appealed to Summers... [for] equity injection into fragile financial institutions and... writ[ing] down mortgages to a realistic market value.... Summers objected that ... such a policy reeked of socialism and America is not a socialist country...
...We found his argument unconvincing–both then and now. By relieving financial institutions of their overvalued assets, the Bush and Obama administrations had already chosen to socialize the downside. Only the upside of sharing in the possible stock gains in the event of a recovery was still at issue! Had our policy recommendation been adopted, stockholders and debt holders (who have a higher propensity to save) would have experienced greater losses than they did, whereas lower- and middle-income households (which have a higher propensity to consume) would have experienced relief from their mortgage debt. This shift in the burden of adjustment would have imposed losses on the people who were responsible for the calamity, stimulated aggregate demand, and diminished the rising inequality that was demoralizing the vast majority of people.
We did recognize a problem with our proposal: providing relief to over-indebted mortgage holders would have encountered resistance from the many homeowners who had not taken out a mortgage. We were exploring ways to overcome this problem until it became moot: the Obama administration refused to accept our advice/ The approach of the Bush and Obama administrations stands in stark contrast both to the policy followed by the British government, and to earlier examples of successful financial bailouts in the United States. In Great Britain, led by then-Prime Minister Gordon Brown, undercapitalized banks were told to raise additional capital. They were given the opportunity to go to the market themselves, but they were warned that the UK Treasury would inject funds into them if they failed to do so. The Royal Bank of Scotland and Lloyds TSB did require government support. The equity injections were accompanied by restrictions on executive pay and dividends. In contrast to Paulson’s method of injecting funds, banks were not stigmatized if they could borrow from the markets. Similarly, during the Great Depression of the 1930s, the US took ownership and recapitalized banks via the Reconstruction Finance Corporation (RFC) and managed mortgage restructuring through the Home Owners’ Loan Corporation (HOLC)...
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