As lawmakers appeared to reach a tentative deal on a Treasury rescue proposal for troubled assets, Steve Quinn, associate professor of economics at Texas Christian University in guest post for Real Time Economics, looks back at Britain’s experience in the 18th century to offer an alternative plan.

The current financial crisis began with the idea that pooling diverse obligations could create a less volatile, more liquid security. Debasement of standards by loan originators and repackaging by bankers, however, has left these securities unmarketable and the financial system in a credit crisis. Now, the Treasury, the Fed and Congress seek ways to bring liquidity to assets originally created to be liquid.

This proposal takes a page from history and suggests creating liquidity through an enormous debt-for-equity swap. Creditors, such as banks and hedge funds, would swap assets for an equity share of the pool created by the amalgamated assets. All the stock would be identical, so the operation would create large amounts of a new, homogeneous asset. In execution, the Treasury could set swap prices by auction to reflect risk, but a simpler approach would offer a 1:1 swap of shares for book value. Obviously, the most toxic obligations will join, and a large amount of homogenous stock will be created. A secondary market and price will quickly emerge.

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Senior citizens have been hit pretty hard in recent months, as those invested in stocks feel the sharpest pain in retirement accounts and those living on fixed incomes have dealt with spiraling inflation costs, but today it looks like they may have gotten a small break.

As part of its annual review of Social Security benefits, the government said more than 55 million Americans will see a 5.8% boost in their benefits in 2009, the largest jump in 27-years. The increase is tied to the consumer price index increases from July through September from one year to the next. Read more »

In the question and answer period that followed Ben Bernanke’s speech today to the Economic Club of New York, the Federal Reserve chairman answered questions on why Lehman Brothers was allowed to fail, whether home prices are the root of the current problems and more. (Read the full transcript here.) Here are some highlights:

Bernanke speaks to the Economic Club. (Associated Press)

Lehman Failure

Lehman was not allowed to fail that in the sense there was some choice being made. There was no mechanism, there was no option, there was no set of rules, there was no funding to allow us to address that situation. The Federal Reserve’s ability to lend which was used in the Bear Stearns case, for example, requires that adequate collateral be posted so that we are not taking credit risk, we are lending against collateral. In this case that was impossible. There simply wasn’t enough collateral to support the lending. From the Treasury’s perspective, unlike the FDIC, deposit insurance fund, there were no funds, there was no option. We worked very hard over one of those famous weekends, with not only some potential acquirers of Lehman but we called together many of the leading CEOs of the private sector in New York to try to come to a solution. We didn’t find one, and therefore we were unable to do what we wanted very much to do, which was to prevent the failure of the company. Read more »

Last week, Damien Hirst sold more than $200 million of pickled animals and splatter paintings in London. A unnamed buyer recently paid $28.5 million for a vintage Ferrari 250 GTO in a private sale, according to knowledgeable chatter on FerrariChat. A single bottle of Domaine de la Romanée-Conti, Romanée Conti 1962 fetched $13,310 (against an auction estimate of $6,000 to $9,000) at a Sotheby’s wine auction in September.

Meltdown? What meltdown?

The easy explanation for these big-ticket blow-outs is that the super-rich simply aren’t effected by what they might politely call “the troubles.” But a second, even more absurd, explanation has also emerged. Paintings, cars, bottles of wine and other collectibles are being touted as safer and higher-yielding investments than financials. Read more »

The American public’s mood is among the darkest in the past 40 years as voters remain pessimistic about their personal financial state and blame everyone within range for the financial crisis.

The latest Journal/NBC News poll shows voters’ economic worries boosting Sen. Barack Obama as he widens his lead over Sen. John McCain, 49% to 43%. (Click here for the full story).

More than three- quarters of those surveyed say the country is on the wrong track. That’s one of the highest marks in four decades — decades that have spanned two impeachments, several major wars and multiple recessions.

The economy topped the list of voters’ concerns, with six in 10 saying that issues like job losses and home foreclosures were more important than foreign policy, social and domestic concerns.

In regards to their personal economic situations, only 35% of those polled said they were confident and optimistic, while 56% said they were worried or uncertain.

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The People’s Bank of China released the following statement on Saturday morning in response to the passage of the U.S. financial rescue package. China’s financial markets opened lower Monday after being closed last week for a national holiday.

The Chinese government has been closely following the development and consequences of the U.S. financial crisis. Recently, the U.S. government’s Emergency Economic Stabilization Act of 2008 has become a focus of world attention. President Hu Jintao has on many occasions said that China hopes for stability in U.S. financial markets and the healthy development of the U.S. economy, which is in the interests of the U.S. and in the interests of China, and is also beneficial to the healthy and stable development of the global economy.

We are pleased to see that, although there were some twists and turns, the U.S. Senate and House of Representatives have finally passed the bill. We hope that this bill can be speedily implemented and achieve positive results, in order to stabilize the U.S. and global financial markets and restore investor confidence. China and the U.S. share common interests in the stability of financial markets. China is willing to strengthen coordination and cooperation with the U.S., and also hopes that countries around the world can work together to overcome difficulties and preserve the stability of international financial markets.

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