So What Would I Do?

Let's take a start. I regard the apparent Tea Party program of massive government spending cuts, more regressive taxation, regulatory rollback and (probably) tight money as disaseterous. I regard the OWS program of raising taxes on the rich and punishing banks as understandable but not very helpful. So what would I say.

Basically, I differ from the Tea Party or OWS in accepting the bank bailouts as a necessary evil. My quarrel was with how they were done. If we had refused to bail out the banks and simply let the financial system collapse, I have no doubt we would be a whole lot worse off than we are today. My guess is the Tea Party would say that the free market would never allow that to happen. If it did happen, they ultimately would say that if a second Great Depression was the free market's will, who are we to quarrel with it. I would further guess that any OWS response would be even less coherent. I would also guess that to the Tea Party, their biggest complaint about the bailout would be the use of taxpayer money and the violation of free market principles. To OWS, it would be that banks have gone unpunished and that the rest of us have not gained anything.

It is a bit hard for me to weigh in on this issue because my understanding of finance is limited, but I would rather spend more money than see the bailout done right than less and see it done wrong. What would be my concept of doing it right? Once again, with a limited understanding of finance I would recommend:

Make the banks write off their bad debts. As we kearned from Japan, if banks refuse to write off bad debts, you ed up with zombi banks. This will no doubt mean a greater expenditure of taxpayer money to recapitalize the banks that would otherwise be the case, but if it actually puts them on a sound footing, it will be well worth the expense.

Meaningful mortgage relief. This would be the counterpart to writing off bad debts. Home owners would get the chance to crawl out from under the mountain of debt that is holding our economy down and banks, in turn, would have to write it off. Granted, this will lead to resentment that some people lived beyond their means and got away with it. To which I answer, so far as I can the overhang of mortgage debt consists of three things, (1) people who bought a house at a grossly inflated price because that was all there was, (2) financially unsophisticated people tricked into fancy mortgage instruments that harmed them, and (3) people who were lived beyond their means, either by buying a bigger house than they could afford or by using their house as an ATM. How relatively important were these three factors. I don't know. But the fact that underwater mortgages are extremely uneqully distributed, ranging from 70% of the total in Nevada to under 10% in New York makes me suspect that the first factor is dominant. Some sort of write down for categories 1 and 2, with a speed-up of the foreclosure process for category 3 would bring down the debt that is weighing us down. Again, it would mean more losses for the banks and therefore more money to recapitalize, but for the sake of ecnomic recovery, it would be well worth it.

Some type of reorganization of the banks to convey the message that they had a serious problem. By all accounts, banks were in deep denial that there was a problem. So were the auto companies. The auto companies went through a major reorganization. Now they are making better cars and (I bet) recognize that they had a problem. The banks are still in denial. (Of course, the two above might be enough to convince them).

Tougher regulations to keep banks from taking excessive risks. Once again, I don't pretend to know enough about finance to have the answers. But requirements would have to include leverage limits (increasing with increasingly risky investments), a testing period for new financial instruments, tough underwriting requirements before anything could be securitized, and better consumer information. I leave the rest to the experts.

Some type of reform in executive compensation. Conservatives worry (justifiably) about moral hazard, but our current system of executive compensation is moral hazard on two legs. Essentially, corporate management gets to decide its own pay, setting itself up to get bonuses if it does well and golden parachutes if it does poorly. (Besides, most top corporate officers have so much money that losing a big chunk doesn't much affect them). In the end, corporations don't make decisions; individuals make decisions. Individuals are also the ones who suffer the real consequences of mistakes. We need to insure that top management, which makes the decisions after all, feels the consequences of those decisions. That is the only way I know to prevent excessive risk taking.

My guess, now, would be that if I presented this list to OWS, some of them might think I was a sellout and a pushover, but others would take consider them a reasonable plan. I would further guess that if I presented this list to the Tea Party they would denounce it as an outrageous violation of free markets and economic liberty. (I have been quite impressed during this crisis at the extent to which conservatives take the assumption that the market knows best to mean that management knows best, and that if a company runs into trouble, it cannot possibly be because of mistakes by the management).