The purpose of the Treasury Department's bailout plan was to instill confidence in the market. It hasn't worked. The Fed announced this week it will being buying commercial paper (unsecured debt) to help firms and instill confidence in the market. It hasn't worked. After yesterday's mammoth losses the stock market has lost twice as much in the past four days as it did in the whole month after Freddie and Fannie went under, triggering the crisis. Instead of stabilizing the market, the governments actions have increased uncertainty.
If we had a time machine we could go back and ask the President to stick by his word from August when he said there would be no bailouts. Without the hint of a rescue Wall Street could have sought other alternatives. As soon as they smelled blood, Wall Street zoned in on the free government money and had their lobbyist convince us all that this was the ONLY way to save us from disaster. They were wrong too.
So now what? The government can play a roll in stabilizing the markets. They don't need to repeal The Bailout to do it. And it could probably be done without Congress too. Using emergency powers, the President's office, the Treasury, Fed, SEC, and IRS should announce the following list of changes:
- There will be a temporary tax freeze for any money that is invested in the US from overseas (both foreign and repatriation);
- There will be a cut in the capital gains tax rate to 10%;
- Immigration and Homeland Security offices will begin lifting quotas for high skilled labor to enter the US on work visas;
- Taxes on any earnings from money invested in the Dow, Nasdaq, or S&P 500 between now and Dec. 31 will be cut or significantly reduced.
Those four measures should instill significant confidence in the market and spur investment AND economic growth in America. It will bring in money and people from overseas, and stabilize our markets (while stabilizing global markets too). If Congress wants to have a say they can reconvene session and pass legislation after the Executive branch makes these unilateral moves.
Meanwhile, there are still some bring spots in the financial sector. Morgan Stanley has the right idea as it struggles under the weight of its bad financial decisions. Instead of running hat-in-hand to the government like AIG, Wachovia/Citigroup, Detroit automakers, or the bulk of Wall Street with the big bailout they have sought financing from the... wait for it... private sector! (cue parade music, fireworks, streamers, and balloons). In order to raise capital to cover its losses, they are planning to sell a 21 percent stake to Japan's Mitsubishi UFJ Financial Group for $9 billion (this was noted on September 29, 2008 by Out of Control). This is how the market should be working and how to survive the crisis.