The Reform We Need

“We are in the midst of the worst financial turmoil since the Great Depression. Absent bold action, matters could well get worse.”


So say Nicholas F. Brady, treasury secretary 1988-1993, Eugene A. Ludwig, U.S. comptroller 1993-1998, and Paul A. Volcker, federal reserve chairman 1979-1987. Writing in the Wall Street Journal, they have recommended creation of a new Resolution Trust Corporation that is discussion topic A at least until markets open tomorrow. The three wisemen make the following points:

 Neither the markets nor . . . regulatory orders, bank examinations, rating downgrades and investigations can do the job. Extraordinary emergency actions by the Federal Reserve and the Treasury [are] insufficient.

 the system is clogged with enormous amounts of toxic real-estate paper that will not repay. . . This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.

 We should move decisively to create a new, temporary resolution mechanism. . . -- such as the Resolution Trust Corporation of the late 1980s . . [--] able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating.

 Such a stabilizing mechanism . . . by buying paper that otherwise is effectively not trading, [would] restore liquidity to the marketplace. . . allow for a more orderly liquidation of this paper, and the chance . . . to recover a portion of its value. . . lessen the number of foreclosures. . . [and save] sick institutions that are so clogged with the troubled paper they cannot continue as independent entities.

The stock market’s rejection of government’s lifeline to AIG—the market’s now, according to my FOX INDEX, 1935 points away from good health (12,000 Dow, 1,300 S&P, 2,500 NASDAQ)—shouts out for even bolder action. I’m sure Hank Paulson’s noticed the market’s panic.