I’ve been reading, and thinking about the recent banking crisis and I don’t think that corporate socialism ^[1] is the answer.   I’ve come up with some thoughts that I think would stem the crisis and not cost the taxpayers, clinic ^[2] or in the case of the current proposal future taxpayers (i.e. our children and grandchildren).

First: Not panic ^[3], We need to fully understand the problem before throwing money at unsound solutions ^[4].

Second ban all credit default swaps (credit derivatives ^[5]). We didn’t have these ^[6] before 2000 and we did just fine without them. There are $62 trillion out there that will still be a danger, but we need to ban them immediately and let the contracts close on the active ones in the coming years.

Third ban all short sales in all markets. Short sales allow you to sell what you do not have.  David Morgan states ^[7]:

“Stocks are legal assets and property, like real estate, or bonds or bank deposits. In just about every other asset and property, short selling doesn’t exist. Try selling a piece of real estate that doesn’t belong to you, and see how fast you go to jail. Selling something you don’t own, whether borrowed from someone else or not, is fraud, pure and simple. (For the purpose of this article I am using the first definition of fraud given by Wikipedia, namely, “In the broadest sense, fraud is a deception made for personal gain”).” 

Large short sellers can manipulate the marketplace, causing a crisis. The reverse is also true, according to Morgan, last weeks banning short sales of 799 stocks allowed the stock market to recover ^[8] last week.

Fourth: repeal the 1999 banking deregulation bill ^[6] that David Cord says “decimated Depression-era firewalls between commercial banks, investment banks, insurance companies, and securities firms”. When a bank held the mortgage that they gave a person, they had to worry if a person was going to pay it and they did a better job at weeding out risky applicants.

These enactments would not cost the taxpayers anything. By not getting into more debt ^[9], we do not further weaken the dollar.

However, some investment banks would fold. Some bankers would lose jobs. But according to  Richard Sheehan ^[10], “Your typical bank, your neighborhood bank, and virtually the entire banking system, TRIF’s, credit unions, savings and loans – all of those are perhaps not in the shape that they’d like to be in, but they’re nowhere near a precipice. They’re not in any tremendous danger in most cases, and there simply isn’t a financial crisis on their end.”

Sheehan also says  that ^[10] there is a very small chance of financial meltdown (less than 5%). If that small chance starts to become a reality, a better plan ^[11] has been proposed by Rosalind Resnick:

“Effective immediately, consumers and businesses would be able to borrow at the fed funds rate at 2 percent, just like the big banks do. This means that every cash-strapped homeowner would be able to refinance his mortgage and cut his payments in half, saving thousands of homes from foreclosure. Consumers could also refinance their credit card balances, auto loans and other debt at interest rates they can afford. And the nation’s businesses, flush with affordable working capital, would now be able to hire employees, gear up production and roll out big ad campaigns just in time to save Christmas.”

After this crisis, we need to balance the budget and have a plan to get the country out of debt.  I also think that as a country we need to have serious discussions about the role our government should have in relationship to the creation of money, money supply, and regulation. 

Again, now is not the time to panic and make decisions that our children and grandchildren will have to pay for.  This is just an opportunity to correct weaknesses in our economy and come back stronger.

Update 1:  9/25/08

Here is a letter signed by 192 ^[12] economists that are against the bailout.