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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:
|
Name
|
Office
|
State
|
Party
|
Grand Total
|
Total from
PACs
|
Total from
Individuals
|
|
Dodd,
Christopher
|
Senate
|
CT
|
D
|
$165,400
|
$48,500
|
$116,900
|
|
Obama,
Barack
|
Senate
|
IL
|
D
|
$126,349
|
$6,000
|
$120,349
|
|
Kerry,
John
|
Senate
|
MA
|
D
|
$111,000
|
$2,000
|
$109,000
|
|
Bennett,
Robert
|
Senate
|
UT
|
R
|
$107,999
|
$71,499
|
$36,500
|
|
Bachus,
Spencer
|
House
|
AL
|
R
|
$103,300
|
$70,500
|
$32,800
|
|
Blunt,
Roy
|
House
|
MO
|
R
|
$96,950
|
$78,500
|
$18,450
|
|
Kanjorski,
Paul
|
House
|
PA
|
D
|
$96,000
|
$57,500
|
$38,500
|
|
Bond,
Christopher 'Kit'
|
Senate
|
MO
|
R
|
$95,400
|
$64,000
|
$31,400
|
|
Shelby,
Richard
|
Senate
|
AL
|
R
|
$80,000
|
$23,000
|
$57,000
|
|
Reed,
Jack
|
Senate
|
RI
|
D
|
$78,250
|
$43,500
|
$34,750
|
We need to get back to basics. Government should pick up the trash and
patch the potholes.
1)
National defense is a basic duty of government. (Article I, section 8 of the
Constitution) It is obvious our armed forces are over-extended. We
need 100,000 more soldiers in the Army and Marine Corps.
Possible threats may require naval blockades of
Iran
or
North Korea
so the Navy needs more ships.
2)
Fighting crime is a basic duty of government. We should increase the
budget of the FBI and forensic labs. The FBI has new anti-terrorism
duties, but its budget has not increased. We need more DNA testing to link
criminals to different crimes and to exonerate innocent prisoners.
3)
The judiciary was established by Article III of the Constitution.
Judges’ pay has not increased with inflation. We need to increase the
pay of federal judges to maintain the quality of justice.
4)
The Patent Office was established by Article I, section 8 of the Constitution.
The Patent Office is overwhelmed with a 2 year backlog of patent applications.
We need to:
- reform production quotas of patent examiners and open regional offices in
locales with lower costs of living than
Washington,
D.C.
- impose user fees. Like passports, if an
applicant wants faster processing, she pays more.
It is likely 20% of patent applications result in 80% of positive
economic impact. Those 20% should
receive priority processing. Applicants
pay a toll for faster processing and for those who cannot pay the toll, a
committee decides whether to reduce the toll.
(similar proposal adopted in June 2010)
- establish bonus fund for patent examiners to improve the quality of patents.
For each year a patent is not invalidated (up to, say, 5 years), the patent
examiner gets a bonus each year.
- reduce frivolous lawsuits by amending the Federal Rules of Procedure to
include an offer of judgment. If a litigant offers a settlement, the other
litigant rejects it and does not recover more than the offer, then the rejecting
party must pay the legal expenses of the offering party.
5)
We must update infrastructure. We need to:
- repair bridges and roads. Fund with
stabilizing gasoline tax. Price of gasoline may increase but it would not
decrease. If actual cost of gasoline decreases, taxes increase to keep
price stable. High gasoline prices discourage consumption. Buying
less gasoline reduces the funds flowing to Hugo Chavez of
Venezuela
and
Middle East
terrorists. Stable gas prices make
the auto market more predictable and help auto companies produce vehicles which
people want.
- If gasoline tax insufficient, reduce earmarks and use the resulting
savings, and also increase use of toll roads.
- update the air traffic control system with GPS technology. Sign on at www.smartskies.org.
However, passengers must pay at least half of the user fees necessary to
renovate the system.
- reduce traffic. Use congestion pricing; if you want to drive during rush
hour, you pay a toll. Expand mass transit and reduce its cost for
passengers. Fund with gasoline tax. This would reduce regressive
effect of gasoline tax.
6)
We need rational immigration laws (Article I, section 8 of the Constitution)
based on market principles.
- There is a 5 year backlog to become a citizen. We need to impose user
fees. Those who can afford to pay more get quicker processing, which
shortens the line for everyone else. The delay is caused by background
checks required since 9-11. User fees would pay for faster and more
accurate background checks.
- We need a guest worker program. If unemployment is 5% or less, we allow
more guest workers. If unemployment exceeds 5%, we allow fewer guest
workers. Some argue that illegal immigrants drive down wages of American
citizens and legal residents. If the average compensation in a particular
occupation decreases, we allow fewer guest workers or immigrants to fill
positions in that occupation.
- Mexicans won’t stop crossing the border until (1)
Mexico
adopts free market reforms, modernizes its economy, and creates more jobs, and
(2)
U.S.
employers stop employing illegal immigrants.
- We should abolish quotas on work visas. If a business can’t find an
American engineer and wants to hire an engineer from overseas, the business can
pay a user fee for a work visa, with the user fee fluctuating according to
demand and supply.
7)
We need to simplify the income tax system (Amendment 16 to the Constitution).
See The Fair and Simple Tax Act (FAST Act), H.R. 5105. People making less than
$40,000 would pay 10 percent; incomes between $40,000 and $150,000 would pay 15 percent
and higher incomes would pay 30 percent. We could file our taxes on one sheet of paper.
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