“This sucker could go down”

Apparently, as he watched the potential agreement for his $700 billion financial bailout package fall apart in a sea of acrimony yesterday, President Bush remarked, with surprising eloquence: “If money isn’t loosened up, this sucker could go down.”

He’s not kidding. Yesterday, with the demise of Washington Mutual, we saw the largest bank failure in American history. The other night, I was trying to explain to my 15 year-old son just how worrying things are at present. “Let’s put it this way – the people who normally tell me to stay calm and think of the long term when I start getting sick to my stomach about the market are telling me that they are sick to their stomach about the market. That’s how bad it is.”

We’re not the first nation to go through a financial crisis like this and we won’t be the last. Reading reports of what transpired in Washington yesterday, with House Republicans coming into the meeting and scuttling the deal, does not inspire one with confidence. We’re in for another rocky day in the markets, for sure.

The counter proposal, from the House Republicans, calls for the government to set up an expanded insurance system, financed by the banks, which would rescue individual home mortgages, rather than buying up the mortgage-backed assets that are wreaking such havoc with financial institutions. They also want, surprise, surprise, less regulation, because, you know, that’s really helped keep us out of trouble, and despite massive deficits, they also want more tax cuts.

There are plenty of commentators out there who are speculating on why the House Republicans are playing this dangerous game. I’ll give you a sampling, here, here and here, so I can stick to the point.

Perhaps the House GOP can learn something from our European counterparts.

There’s an interesting article in the New York Times this morning about how the Swedes solved their banking crisis in 1992.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

I want some equity for my portion of the $700 billion bailout. Although my Republican friends might be shuddering, viewing this as the first step down the road to socialism, I call it getting a return on my investment as a taxpayer. And my Republican daddy always taught me getting a good return on an investment is a good thing.