How to Repair What Ails Us

Over the past several weeks and months, we have continually identified errors, flaws and mistakes being made by policy makers.

Some of these errors were due to mistaken assumptions — that a firm like Lehman could go bankrupt without significant repercussions elsewhere in the financial system. Some were an issue of focus, such as the unhealthy obsession on asset price deflation and "confidence." Others involved the lack of leadership at the top — the 3 page TARP proposal was laughable indictment of an AWOL president, and a flailing administration. Others were just plain ole dumb, like canceling short sales; this removed the most aggressive buyers during any crash. Its no coincidence that the worst week in the market’s history occurred when there was no shorting allowed.

We’ve already spent enough time pointing fingers; Its time for some concrete suggestions as to how to fix the mess:

1. Recapitalize Banks: We’ve discussed this previously; Its the root of the credit freeze. We should follow a Swedish/Buffett/British type preferred purchase plan. Match private equity investments, allowing the private sector with their own capital at risk to select the banks to be saved and the terms of the investments. 

2. Suspend Dividends for 1 year: US banks are sending $40 billion per year to shareholders, when they should be holding onto every last dime. No bank want sto do this, as their share price will get even further slaughtered. The Fed should call for a 6 month (or 1 year) suspension of divs, and require this to be enacted if banks want access to their lending facilities.

3. Guarantee ALL deposits for 6 months: To stop money from flowing out of banks, the Fed and FDIC should announce zero limits on bank guarantees.

4. Mortgage Workouts: Those homeowners that are in a position to be possibly saved, should have their own mortgages reworked. Use the HOLC standards: One home per family, primary residence, less than $1 million dollars, etc.  Exclude flippers, speculators and those folks in homes they cannot possibly afford.

5. Guarantee all interbank lending: If you want to see banks begin lending again, have the Fed — the lender of last resort — guarantee the transactions.

6. Kill the Bad Banks: Aggressively seek and destroy those banks that won’t make it. Put down the bad banks so those that can be saved can be rescued.

7. Restructure Regulations Intelligently: This crisis creates an opportunity to streamline and intelligently restructure banking and financial regulations. This will likely fall to the next administration to do. Let’s hope they do a better job of it than either of the past two administrations.

8. Coordinate with other Countries: In the early phases of this crisis, we did not do a good job in convincing other nations the system was at risk. Some of this stems from the worldwide weakened opinion of the US (post Iraq), and some was simply poor salesmanship.

9. Start listening to experts: Ignoring warnings of failures,
and criticism of policy flaws has gotten the country into this mess.
The general disdain for expertise and experience in Washington D.C. is
nothing short of astounding. Take advantage of the intellectual capital
in the USA.

10 Lead: The absence of strong leadership allowed a bad situation to become much much worse. We need forward looking thinkers in positions of authority.  Let’s hope the next administration — Obama or McCain — is smarter then a the gang that couldn’t shoot straight who is presently mismanaging things.

I am very confident that an intelligent application of the strategies and tactics discussed here and elsewhere can lead us out of the present mess. Let’s hope we have the courage to do what’s necessary, to make the hard choices and sacrifices that will put us back on the road to prosperity.


Fix the Credit Problem, Not its Symptoms (October 2008)

Fixing Housing & Finance: 30/20/10 Proposal (September 2008)

Alternative Ideas for Rescue Plans (September 2008)

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