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Yesterday, we asked for your help in passing a bill that we, after much deliberation, believe would protect the taxpayer. The volume and outrage of many of your responses was impressive, to say the least. We need to provide more context.
First, understand that we are as frustrated as you are about this situation. There was incompetence, negligence, and outright fraud, and we're angry about the liberties some have taken in abusing our capital markets. However, we need to confront a brutal reality: The condition of the credit markets jeopardizes our economy.
Our position on this is governed by three overriding principles:
- That letting massive portions of our financial sector fail would have enormous negative effects across our economy.
- That although we'd prefer a free-market solution, the U.S. government is the only entity with resources sufficient to make a significant impact.
- That government intervention must protect the interests of the American taxpayer.
As stock-market investors, we may not focus that much on the credit markets, so it is critical to remember how much the credit markets mean to our way of life. Credit accounts for the overwhelming majority of the money supply in our economy.
If the reliability of our credit markets is undermined, there are innumerable consequences. For the economy, the credit crisis means lower investment, lower spending, recession, business failures, and a massively devalued stock market. For the average taxpayer, this means watching 401(k)s plummet and putting on hold plans to retire, buy a house, or go to college, and for many it will mean layoffs, foreclosure, and bankruptcy. This type of crisis is not only unacceptable but also unnecessary.
While we greatly prefer free-market solutions, this is a time for government intervention, because only our Treasury has the resources to help our financial system get back on its feet. If the crisis persists, we could be in for a consumer depression, which would hurt us all far more than it would cost us to prevent it today. We do not say this with any pleasure: The choice is between taxpayers taking on the responsibility for this crisis in an orderly fashion or a non-orderly one. Either way, we're on the hook to clean up the mess.
Now, as we begrudgingly support intervention today, we demand that taxpayers' interests be the dominating priority. There are far too many details and too many other people working directly on this for us to be prescriptive here. What we are demanding are certain standards of minimum acceptability during any financial repair.
The plan must be effective at restoring confidence in our capital markets. The banks should pay a fair price for the capital. And we believe the deals should include some form of equity (such as warrants) from the banks requiring relief. Similar steps have been taken with Fannie Mae (NYSE: FNM ) , Freddie Mac (NYSE: FRE ) , and AIG (NYSE: AIG ) . Taxpayers deserve upside for investing capital to fix a crisis they did not create.
Please note, we are not advocating long-term government ownership of this equity. At some point down the road, the government should be required to liquidate its equity position in the recovered banks, but this is a detail to be worked out later. As stated earlier, at this point we are mainly concerned with ensuring a minimum level of taxpayer protection.
Just as Warren Buffett cut an excellent deal with Goldman Sachs (NYSE: GS ) this week, the government needs to strike an excellent deal on behalf of taxpayers. We should participate in the value creation brought about by the "second lives" we are providing. And these profits the government makes should be returned to the taxpayers.
If you are in agreement with these principles, please send an email similar to this one (from Fool community member jeffbas) to your elected officials. Find their email addresses at www.house.gov and www.senate.gov.
Fools, these are extraordinary times. This is not business as usual. Our country and system are the greatest the world has known; indeed, the rest of the world needs us to make this right. We will get through this. We need to demand that our leaders get us through this in ways that serve the best interests of their investors -- taxpayers in America.
Scott Schedler, President, The Motley Fool
P.S. Our discussion board on this issue remains lively with opinions, so please come and share yours with us.
Motley Fool President Scott Schedler owns no shares of any company mentioned in this article. The Fool has a disclosure policy.