Well, it’s been quite a ride in the financial markets. Politicians (specifically Reid and Pelosi) have admitted “They don’t know what’s going on” (the only honest phrase to come out of Congress in quite awhile.) Meanwhile, McCain has said that SEC chairman Christopher Cox should be fired, which is the type of pandering that usually comes from the Brie and Chablis crowd. That’s libards for you in the Brie and Chablis crowd. If you think you’re one of them, you most certainly are.
There are not going to be any quick fixes, nor should there be a backlash by Congress to start over-regulating the markets. In a way, over-regulation was how we got here (goes back to Congress mandating the underwriting of mortgages to non-qualified buyers promoting home ownership…so all kinds of lax standards, shady brokers, swaps to manage the new risk, etc. sprang up).
Congress should realize the most stupid person on Wall Street is smarter than the smartest member of Congress when it comes to financial markets. No matter how onerous the regulations, money guys will figure our how to get around it and lay off the risk and, due to the “Greenspan Put, lay it off on the taxapayers….i.e. you and me.
Having said that, here’s some ideas for a framework going forward….Cliff Notes version.
1) Whoever underwrites the mortgage has to hold it for five years; if the mortgage is an ARM, the underwriter has to hold the mortgage up to the first rate reset and then, for three years after the first rate reset. This would tighten underwriting standards, force the “fly-by-night” brokers out business and reward well-capitalized mortgage firms. In addition, there would be vastly improved communication to potential borrowers. Underwriters of ARMs would go to great lengths to disclose what the payments would be after the rate reset since they will be forced to hold the mortgage after the rate reset.
2) Put the U.S. on the gold standard through monetary policy. I don’t think we can ever go back to a pure gold standard since there may not be enough gold in the world to do it. However, The Fed through monetary policy could mandate that the price be, say, $500 per ounce. Steve Forbes, Editor of Forbes has been advocating this for years. As Mr. Forbes points out….
The first prescription for a cure is to formally strengthen the dollar and announce it publicly. A year ago August the price of gold was more than $650 per ounce. In late 2003 it had breached $400. The Fed should declare that its goal for gold is around $500 to $550. That would stabilize the buck–and stability is essential if animal spirits and risk taking are to revive.
3) End the mark-to-market policy. Again, I go to Mr. Forbes since his analogy is much better than the one I came up with.
Think of the mark-to-market madness this way: You buy a house for $350,000 and take out a $250,000 30-year fixed-rate mortgage. Your income is more than adequate to make the monthly payments. But under mark-to-market rules the bank could call up and say that if your house had to be sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house.
Absurd? Obviously. But that’s what, in effect, is happening today. Thus institutions with long-term assets are having to drastically reprice them downward. And so the crisis feeds on itself.
4) Abolish taxes on savings income. This change would encourage savings and help banks restore their lending base. By doing so, it would cut the reliance of banks on the Fed Discount Window thus freeing up liquidity and helping with point #2, above.
5) Re-establish the Resolution Trust Corp. (RTC). Think of the RTC as a “bad bank” i.e. all the truly bad loans would go to the RTC which would then enter the workout phase. But don’t treat it like a funding gift from taxpayers. Make the officers of the RTC accountable and hold them to results. Pay bonuses to the people who out-perform the market and the new RTC will attract some of the laid-off talent in the financial markets.
6) In line with #5, above, draw the line in the sand and announce the end of the “Greenspan Put” i.e. no more bailouts…period. I’ve written about the Greenspan Put and how it erases the “stupid penalty”. Put the stupid penalty back into the markets and watch the moronic risk-taking dry up. Risk-taking would still occur…it has to for the economy to move forward…but firms would have to adequately access the risk and price it accordingly. The end of the Greenspan Put would have the added effect of enabling shareholders and potential sharebuyers to realistically evaluate financial firms.
7) Forget about tax hikes. In fact, there should be permanent tax cuts across the board. Cutting capital gains taxes to 15% would be a great start. Cut the top marginal rate to 28%. Should Nobama get elected and the moronic Dems in Congress go along, the economy will sink fast.
Keep Congress out of the CEO suite when it comes to salary. That’s for boards to decide. With the end of the Greenspan Put, the stupid penalty will come into play. With the ability to adequately access the value of firms within framework, above, shareholders will punish firms that get stupid….as they should.
9) In line with #8, end the “uptick rule” for short selling but put an end to naked shorts. The ability to short a stock is a valuable tool to enact the stupid penalty for recalcitrant boards and CEOs. However, you must either own the stock or provide absolute proof that you, as the short seller, have borrowed the stock.
10) Get rid of Sarbanes-Oxley, the onerous reporting requirements that were supposed to provide all this “transparency”. It didn’t work too well, did it?
