Solving the financial crisis:

1) Require immediate full disclosure of excessive leverage and the capital of derivative traders.  Require derivatives such as credit default swaps be traded on an exchange such as the Chicago Board Options Exchange (CBOE) or regulated by state insurance commissioners.  Everyone must make full disclosure, including Wall Street firms, hedge funds and private equity firms.  Banks pay premiums for deposit insurance, so derivatives traders must pay premiums to fund these outrageous bailouts.  The AIG bailout has cost $183 billion, so derivatives traders owe U.S. taxpayers $183 billion.  Ban credit default swaps unless investors own the underlying bonds. (Jan. 2009: House Agriculture Committee Chairman Collin Peterson’s draft bill)  The value of credit swaps cannot exceed the value of the actual bonds.

2) Directors and officers of companies (Bear Stearns, AIG, Lehman Brothers, etc.) that traded derivatives without sufficient capital should be barred from the financial industry, sued to recover restitution for shareholders, and tarred and feathered.

3) Directors and officers of companies (Countrywide) that made subprime mortgages without a down payment, verification of income, etc. should be barred from the financial industry, sued to recover restitution for shareholders, and tarred and feathered.  If someone wants an “affordable” mortgage, they can apply for an FHA (Federal Housing Authority) loan, make a 10%-20% down payment and verify their income, like the rest of us.  Abolish the Office of Comptroller of the Currency (OCC) which sued to block states from regulating liar mortgage loans to borrowers who could not afford them.

4) Liquidate or privatize Fannie Mae and Freddie Mac.  No more crony capitalism!

5) Issuers of asset backed securities should be required to file with the SEC extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, and whether they were sold as SEC registered offerings or private placements.  By creating a centralized database with this information, the pricing process for the toxic assets becomes possible.  Kenneth E. Scott (Stanford law professor) and John B. Taylor (Stanford economics professor), “Why Toxic Assets Are So Hard To Clean Up,” 7/20/09 Wall Street Journal, p. A13.

6) Investing government funds by buying preferred shares of banks was correct.  We needed to bolster the capital of companies who inherited impaired assets so that they could absorb any losses or have the ability to wait until the market recovers for those assets.  Going forward, we should establish another Resolution Trust Corporation to take bad assets from banks and other companies.  If we don't want to create another government bureaucracy, have Fannie Mae or Freddie Mac buy the bad assets.  Establish a reverse auction to establish the price of the assets.   Holders of impaired assets could: (a) sell them in the private market and take the loss, (b) hold them to wait for values to recover and pay 5% dividends on the preferred shares the government bought, or (c) sell them to the new Resolution Trust Corporation and take the loss.  

7) Because the ideal solution is to encourage holders of impaired assets to sell them in the private market, give buyers temporary tax concessions such as 0% or 10% capital gain tax rate if the buyer holds the impaired asset for at least a year.  Alternatively, in order to attract private capital, the new RTC would issue shares tied to a liquidating trust of bad assets.  If held to maturity, the government would guarantee no loss of principal, and the investor could reap whatever dividends or capital gains the shares generate from the restructuring or sale of bad assets.  One advantage of Treasury Secretary Geithner's Public Private Partnership Investment Program is taxpayers share in any gains.

8) Modify mark to market rules.  Securities composed of mortgages should be treated the same way as mortgages actually held by the bank.  If a bank had made the mortgage and kept it, and the borrower stopped paying, it would be classified as in default, delinquent, and after, say, 6 months, charged off.  The mortgage would not be considered worthless immediately.  Impaired assets, securities comprised of defaulting mortgages, could be marked down over the same time period regular mortgages are.  Or if the impaired asset was supposed to pay $100 of interest and it is paying only $80 of interest, then the impaired asset should be marked down 20%.  In addition, if the property is foreclosed and resold, a lender could recover some amount, say 50% to 66%, not $0, so the mortgage securities should not be valued at 10% of the original value.

9) We need to let the market work its magic.  Do not modify mortgage contracts or stop foreclosures.  This just rewards imprudent lenders and borrowers.  People who could not afford the houses in the first place should surrender the keys to the bank and rent an apartment.  The faster prices fall, more bargain hunters will bid, and prices will stabilize.  This started to happen in the fall of 2008, but bargain hunters could not get financing.  The Federal Reserve was correct to lower mortgage rates by buying more long-term mortgage backed securities.  (Lawrence Yun, chief economist of National Association of Realtors, January 26, 2009 Barron’s, p. 47)  This move rewarded prudent borrowers who did not over-extend themselves to buy a house and kept current on their payments.  The government should not extend the tax credit for first time home buyers; there is already too much government subsidy of the residential real estate market.  

10) If credit default swaps or collateralized debt obligations are not involved, let the FDIC close banks.  We have survived normal real estate busts in the past.  One reason Japan’s economy lagged for 20 years was it propped up zombie banks too long and failed to recognize reality.

11) Stop subsidizing residential housing.  The FHA has run out of money, so it should stop guaranteeing loans.  Increase down payment requirements.

12) Break up companies which are "too big to fail" or regulate them as though they were utilities.  If they expect a government bailout, they have to pay insurance premiums, just as banks pay FDIC premiums.  To prevent panics, give the Federal Reserve authority to decide whether to place a company in receivership and whether to appoint the FDIC as receiver.

13) Before the financial crisis, securitization had funded lending for 59% of mortgages, 50%-60% of credit card debt and 90% of auto loans.  Make mortgage securities and asset backed paper more standardized and transparent.  Disclose data on the underlying loans and borrowers in a uniform manner.  Darrell Duffie of Stanford Business School.  I would want to know what the down payments were (10%, 20% etc.) and the credit ratings of the borrowers.  Impose banking regulations on structured investment vehicles (SIVs) by requiring minimum capital, regular examinations, and access to the Federal Reserve's discount window. Gary Gorton of Yale University. 12/28/09 Barron's, p. 25.

14) As economist Robert Reich proposes, give companies a tax credit for employment taxes (Social Security, Medicare) paid on the first $15,000 of income of each employee.  Such a credit would encourage companies to hire employees and reduce the regressive nature of employment taxes.  

15) Reich's proposal lowers a company's cost of hiring a worker.  The Democrats' health care reform proposals would increase the cost of hiring a worker and therefore would cause higher unemployment. 

16) Reduce unemployment by increasing the size of the pie.  Ratify free trade agreements such as those with South Korea and Colombia.

17) Focus infrastructure spending on needs rather than pork: 
a) build new ports or expand current port capacity, 
b) modernize the electrical grid to reduce waste and increase efficiency.  If we lower the cost of electricity, everyone benefits and more people will buy plug-in hybrid cars, thereby reducing gasoline use, pollution and greenhouse gases, 
c) build more mass transit, not more highways, thereby reducing gasoline use, pollution, and greenhouse gases, 
d) fund deferred maintenance on bridges, sewers, etc.
e) modernize the air traffic control system

18) Healthcare spending will bankrupt the United States.
a) expand health savings accounts.  If people spend their own money rather than someone else's money, they will be more frugal.  i) or enact "The Whole Foods Alternative to ObamaCare," 8/11/09 Wall Street Journal, similar to the above. http://online.wsj.com/article/SB10001424052970204251404574342170072865070.html 
b) or enact The Patients' Choice Act by Congressman Paul Ryan (R-Wisconsin) which lets patients choose from the same health plans available to Congressmen. http://www.house.gov/ryan/PCA 
c) Wealthy people, such as AARP members, could help subsidize health coverage for younger, poorer Americans.  In an eBay or Facebook system, a benefactor could see the photos of working class Americans and select the families they wanted to help.  Or contribute now to Remote Area Medical which provides free clinics to the uninsured.  www.ramusa.org  
d) House calls cost less than emergency room visits.  Set up neighborhood clinics with physicians, physician assistants or nurse practitioners who make house calls
e) Raise more revenue for health care by imposing uniform cigarette taxes across the country.  Currently cigarette taxes are different in different states, so organized crime smuggles cigarettes from low tax states to high tax states.  The federal government should add impose an excise tax to equalize the price of cigarettes in all states, dedicate the funds to a healthcare trust fund, say, to pay for Medicaid or community clinics, and eliminate a revenue stream for organized crime.
f) move Medicaid patients to managed care.  If costs are reduced and we still have Obamacare, move patients to managed care. (5/8/10)
g) if everyone lost weight and exercised more, health costs would decline.  A salad costs more than a Big Mac.  Stop subsidizing the production of meat, milk, cheese, grains, sugar and alcohol.
19) Vote against politicians who received the most contributions from Fannie Mae and Freddie Mac, such as Senator Christopher Dodd (D-CT).  Dodd also received sweetheart refinancing (no fees) of his mortgage from Countrywide.  For the full list, see http://www.opensecrets.org/news/2008/09/update-fannie-mae-and-freddie.html
The top 10 recipients: