With a bank rescue package stalled in Congress, many economists and bank executives said Monday that lawmakers should consider alternatives to prevent the financial crisis from spreading.
Their proposals range from the modest, such as expanding limits on federal deposit insurance, to the far-reaching, such as having the government invest directly in financial companies. They concede their proposals have serious flaws -- and some are self-serving.
But the suggestions came as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have few options. "Our toolkit is substantial, but insufficient," Paulson said.
Indeed, if a version of the bill doesn't ultimately pass, the Fed and Treasury would have little choice but to return to their strategy of the past 14 months: making case-by-case decisions. But this ad-hoc approach does not relieve the financial system of its vast holdings of toxic mortgage-related assets, economists said.
Scott Shay, chairman of Signature Bank, suggested that the government insure all deposits of any sort, including money market accounts, and up to any amount, for 180 days. During that time, the government would investigate both large and small banks to determine which should be closed.
Others see helping homeowners as a better solution. "The government should directly purchase housing assets, not real estate bonds," John Allison, the chief executive of BB&T, a regional bank in North Carolina, wrote to Congress. "This would include lots and houses under construction."
Instead of buying bad loans from banks, Congress should consider investing directly in financial companies, said Jared Bernstein, senior economist at the Economic Policy Institute, a liberal research group.
Another proposal comes from investors who say the government should lend money to them to help them buy troubled assets. "The idea here is that if the government provides this funding, then asset managers who really understand the assets the best would have the opportunity to bid more aggressively for them," said Matt Chasin, formerly of Bear Stearns and now the chief operating officer of Sorin Capital Management, a hedge fund.
