Instead of just complaining about how bad things are, as I was this morning in What If The Banks Failed, I will take a moment to be constructive and answer the question: "Okay, Mr. negative talk, how would you do things differently?" Here is what I would do:
The top 4 Too Big Too Fail banks have a stranglehold on our economy. They are insolvent and they are sitting on cash waiting to take losses, but they are not forced to take their losses because of the new accounting changes. Therefore we have an economy that is artificially held up and cannot recover. Real estate; commercial and residential, stock prices, and corporate debt are artificially too high which will not allow the system to cleanse and recovery to begin.
So here is what I would do:
The President announces a comprehensive plan alongside the Federal Reserve detailing all steps that will be put in place in order to stem any panic before the program begins:
1. All checking and savings deposits around the country are 100% backed by the Federal Reserve and Treasury. If your money is at a bank that fails, your account will be government owned until a new bank takes over your deposits. (This already happens every week and is run by the FDIC)
2. All money markets and CD's at banks will be 100% backed by the Federal Reserve and Treasury. The money markets must have been created before this announcement is made.
3. The mark to market rule goes back into effect immediately. Banks must be forced to write down losses and if they do not have the cash to cover then they must enter bankruptcy. The bad debt for the largest banks will be handled by the government and FDIC in the Resolution Trust Corporation II (the first was in the early 90's) where the assets are sold into the market place at free market prices.
4. Fannie Mae and Freddi Mac enter bankruptcy. Their portfolio is liquidated as part of the Resolution Trust Corporation II.
5. A new budget program is announced slashing the major entitlement programs, military spending, and creating a real solution to future debt repayment.
6. $500 billion in a new stimulus package will be given to a group of the next 30 largest banks that are healthy. They did not participate in the subprime debacle, and they have a clean balance sheet.
What would happen?
Many bankers, stock brokers, traders, mortgage lenders, and employees at the Too Big Too Fails would lose their jobs. Where would they work? At another healthy bank.
The stock market would most likely fall sharply finding a free market price and presenting a strong buying opportunity.
Residential real estate and commercial real estate prices would fall sharply as the supply was allowed to enter the system finding a free market price and presenting a strong buying opportunity.
Our currency would fall sharply on the news but find a bottom as foreign leaders understand that we are taking steps to begin recovery. There would be outrage from foreign countries over the losses taken on Fannie/Freddie debt. People say they will respond by dumping treasury debt. I say, no they won't, it is more likely they become a buyer of our newer stronger debt. Our weaker currency would help balance the global market place as we can once again focus on exports and being competitive.
The loss of Fannie and Freddie would cause mortgage rates to rise sharply. Buyers would also be forced to put down a large down payment to purchase. Loans would come from the $500 billion in cash sitting on the balance sheets of the new banks. No homeowners would live on the streets. They would rent in the 40 month supply of homes that would be purchased by investors and business people who have real capital available to purchase assets.
The $500 billion in stimulus money would not sit on the new bank's balance sheets to cover future losses. It would be lent out into the market to investors who want to purchase the correctly priced assets. It would be lent to business people who want to start a business and create jobs. It would be lent to companies focused on developing new technology and health care research so America can once again have value with our trading partners.
This is how America was designed when we arrived on these shores, and it is sad that it is no longer the free market capitalist country that created more prosperity and wealth than any other country in history.
This solution will never be discussed in a serious way by our leaders. Both the democrats and republicans receive MASSIVE checks every year from the too big too fail banks and those checks determine the decisions our leaders make.
Where is free market capitalism seen today in the world? Ironically, it is now practiced most commonly in communist China.
If your children have the opportunity to learn the mandarin language in school I would push them hard to take the courses. They are growing up on a sinking ship, and the opportunities this century to prosper in China will be limitless.