Early Thoughts on the DeFazio Bill

by Ian Welsh [courtesy of Firedoglake]

Yeah, sure buddy

Progressives are pushing the DeFazio bill, it has five main features.

1.  "A change from mark to market pricing to mark to some sort of model."  In general this makes me twitchy, but it depends how it is done.  Paulson's suggestion of mark to maturity was insanity, but depending on how this is done it might work.  Need to see the bill.

2. "Require the Securities and Exchange Commission to restricting naked short sells permanently."  Not too thrilled, but as long as regular short selling is still allowed.  This will increase volatility somewhat, but so be it.

3. "Require the Securities and Exchange Commission to restore the up-tick rule permanently."  Didn't do any harm for 70 odd years, won't do any harm now.

4. "The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future.  For those entities that qualify, the FDIC should purchase net worth certificates in these institutions.  In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount "borrowed" as capital on their balance sheets."

Don't see why we don't get Buffet shares - 10% preferred convertible convertible to bonds.  But whatever, if the US is going to give money, give money.

 5. Increase the FDIC Insurance limit from $100,000 to $250,000.  Good idea.

Concluding Remarks: Is this a good bill?  The very existence of the bill is good, because now there is a bill based on different principles than the Obama-Paulson bill.  And even if it's a bit bad, it's easily fixed.

In technical terms, how good it is depends on three things, how much money it involves; whether the money is a one time thing, and how the mark to model is done.  If it's, say 200 billion to tide things over, than so be it. If it's just another way to flood 700 billion or 1.5 trillion dollars, then there's little difference.

Also, this bill, if done long, is a Japanification bill.  It leads to a long "bright" depression style economy for a good to 20 to 30 years.