While the very players whose policies and inaction brought about the current economic crisis try to stampede the Congress into an unsecured bailout, four analysts who predicted the situation offer other measures. It is past time for Congress to seek the advice of experts whose better understanding of the macroeconomic situation produce options less likely to create a collapse of the dollar and dire straits for the general populace. The following four have all written on the subject for the intelligent non-economist, and this is what they suggest:
Nobel Prizewinning Economist Prof. Joseph Stiglitz in "How to Prevent the Next Wall Street Crises" <
http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html>:
(After a brief outline of what brought us to this pass, Stiglitz's recommendations following)
"1. We need first to correct incentives for executives, reducing the scope for conflicts of interest and improving shareholder information about dilution in share value as a result of stock options. We should mitigate the incentives for excessive risk-taking and the short-term focus that has so long prevailed, for instance, by requiring bonuses to be paid on the basis of, say, five-year returns, rather than annual returns.
2. Secondly, we need to create a financial product safety commission, to make sure that products bought and sold by banks, pension funds, etc. are safe for "human consumption." Consenting adults should be given great freedom to do whatever they want, but that does not mean they should gamble with other people's money. Some may worry that this may stifle innovation. But that may be a good thing considering the kind of innovation we had -- attempting to subvert accounting and regulations. What we need is more innovation addressing the needs of ordinary Americans, so they can stay in their homes when economic conditions change.
3. We need to create a financial systems stability commission to take an overview of the entire financial system, recognizing the interrelations among the various parts, and to prevent the excessive systemic leveraging that we have just experienced.
4. We need to impose other regulations to improve the safety and soundness of our financial system, such as "speed bumps" to limit borrowing. Historically, rapid expansion of lending has been responsible for a large fraction of crises and this crisis is no exception.
5. We need better consumer protection laws, including laws that prevent predatory lending.
6. We need better competition laws. The financial institutions have been able to prey on consumers through credit cards partly because of the absence of competition. But even more importantly, we should not be in situations where a firm is "too big to fail." If it is that big, it should be broken up."
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Robert Kuttner, respected author of the 2007 book on neocon destruction of our economic health, "Squandering America" and cofounder and editor of The American Prospect magazine in "Seven Deadly Sins of Deregulation" <
http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms>:
After a detailed discussion of the policy failures that allowed the creation of this mess, Kuttner recommends
"
Reform One: If it Quacks Like a Bank, Regulate it Like a Bank. Barack Obama said it well in his historic speech on the financial emergency last March 27 in New York. "We need to regulate financial institutions for what they do, not what they are." Increasingly, different kinds of financial firms do the same kinds of things, and they are all capable of infusing toxic products into the nation's financial bloodstream. That's why Treasury Secretary Hank Paulson has had to extend the government's financial safety net to all kinds of large financial firms like A.I.G. that have no technical right to the aid and no regulation to keep them from taking outlandish risks. Going forward, all financial firms that buy and sell products in money markets need the same regulation and examination. That will be the essence of the 2009 version of the Glass-Steagall Act.
Reform Two: Limit Leverage. At the very heart of the financial meltdown was extreme speculation with esoteric financial securities, using astronomical rates of leverage. Commercial banks are limited to something like 10 to one, or less, depending on their conditions. These leverage limits need to be extended to all financial players, as part of the same 2009 banking reform.
Reform Three: Police Conflicts of Interest. The conflicts of interest at the core of bond-raising agencies are only one of the conflicts that have been permitted to pervade financial markets. Bond-rating agencies should probably become public institutions. Other conflicts of interest should be made explicitly illegal. Yes, financial markets keep "innovating." But some innovations are good, and some are abusive subterfuges. And if regulators who actually believe in regulation are empowered to examine all financial institutions, they can issue cease-and-desist orders when they encounter dangerous conflicts."
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Dean Baker, co-Director of the Center for Economic and Policy Research, in the paper "Subprime Rescue Plans: Backdoor Bank Bailouts" <
http://www.cepr.net/documents/publications/bailout_2008_03.pdf>:
Since Dr. Baker believes "monthly housing payments for the
homeowners {facing foreclosure} are likely to be close to 85 percent higher
than what they would be if the homeowner rented a comparable unit," he recommends what he feels would be a less costly aid to endangered homeowners than a straight subsidy.
"In particular, if foreclosure rules were temporarily altered, to give moderate-income homeowners facing foreclosure the option to rent their home at the fair market rent, it would provide a large element of security to the millions of moderate-income families at risk of losing their home. Furthermore, this temporary change in foreclosure rules would provide a very strong incentive to lenders (who do not want to become landlords) to negotiate terms under which homeowners can stay in their house as homeowners. This plan also has the advantage that it requires no government money and no new bureaucracy."
Dr. Baker has not yet addressed the overall subject of the Administration's bailout demands.
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William Grieder, author of several books including Secrets of the Temple: How the Federal Reserve Runs the Country, One World, Ready or Not, The Divine Right of Capital: Dethroning the Corporate Aristocracy, and The Soul of Capitalism: Opening Paths to a Moral Economy in "Paulson Bailout Plan a Historic Swindle" <
http://www.thenation.com/doc/20081006/greider>:
Grieder makes a distinction between the S&L bailout and the Paulson plan "failed S&Ls held real assets--property, houses, shopping centers--that could be readily resold by the Resolution Trust Corporation at bargain prices" which supports his contentions that "The scandal is not that government is acting. The scandal is that government is not acting forcefully enough--using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets."
He recommends "first, require a new central authority to supervise the financial institutions and compel them to support the government's actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.
Only with these conditions, and some others, should the federal government be willing to take ownership--temporarily--of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets--property, houses, shopping centers--that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value--not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless....
If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and "too big to fail" institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars.
More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss--their situation is too dire--but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms.
The government, meanwhile, may have to create another emergency agency, something like the New Deal, that lends directly to the real economy--businesses, solvent banks, buyers and sellers in consumer markets. We don't know how much damage has been done to economic growth or how long the cold spell will last, but I don't trust the bankers in the meantime to provide investment capital and credit. If necessary, Washington has to fill that role, too.
Finally, the crisis is global, obviously, and requires concerted global action. Robert A. Johnson, a veteran of global finance now working with the Campaign for America's Future, suggests that our global trading partners may recognize the need for self-interested cooperation and can negotiate temporary--maybe permanent--reforms to balance the trading system and keep it functioning, while leading nations work to put the global financial system back in business."
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(Cross-posted to Daily Kos)
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