There are basic “flaws” in the proposed $ 700bn bailout package for reviving ailing financial industry in the US and the American people do not want to pay higher taxes to bail out mega wealthy Wall Street bankers, he said.
Observing that the Federal Reserve has lent billions of dollars to banks to encourage them to start lending again, Proctor said it was like “putting an oxygen mask on a suffocating patient” rather than addressing the reasons for choking.
Though the US authorities have proposed to buy all kinds of bad loans from banks using taxpayers’ money as part of fixing the solvency problems, he said it was like ignoring the patient.
Proctor suggested for the US homeowners, the government make an open offer to bank to buy at a discount a certain type of bad loan (owner-occupier mortgages taken out by borrowers whose income is below a certain level).
Loans used to buy a second home, settle credit card bills or car loans should be excluded from the scheme, he said, adding it would be left to each bank to decide the selling price for the mortgages — the government would simply choose the cheapest price (the most desperate banks should offer a very attractive discount).
“Because the government pays a low price, it can afford to pass on the benefit to the homeowner by reducing their mortgage repayments,” he said.
For banks, Proctor said, a different US government entity should offer to buy new bonds or preferred shares from any bank that sold mortgages at a discount to the government, at a rate of $ 1 of bonds purchased for every $ 10 discount on the price of the mortgage.
“This fresh injection of capital helps the banks to offset their losses, and improves their credit rating because the US government is now a bond or equity holder,” he said.
Naturally the government could require certain conditions to be met, including a change in management or a cap on executive salaries, he added.
Although the Federal Deposit Insurance Corporation (FDIC) guarantees deposits of up to $ 100,000 in the US banks, he said FDIC should hike this guarantee to cover deposits up to $ 1mn – in return, the banks would pay a fee to the FDIC.
Taxpayers will then be assured that their cash was safe in the banks, Proctor said, adding banks’ credit standing improved because they have stable deposits and market traders will stop panic selling because they would finally see some effective action being taken.
He said Americans had borrowed too much money and could not afford to repay their mortgages, car loans and credit card bills, resulting in solvency problem.
As a result, he said, banks now know they will not get all their money back, but do not yet know how bad the problem is.
