
This last one sucked, didn’t it? We’ve had them before, for instance in the 80’s, we had the S&L Crisis (Google it). And didn’t something happen back in the 30’s? And oh yea… the Dutch had some problems with tulip bulb futures as far back as the 1600’s.
What is at the heart of ALL financial meltdowns?
The future. Or, money from the future, or promised to the future.
Other people. Or, more precisely, their money.
Combine the future and other people’s money and you get crazy wacky why the hell did we do that bubbles that eventually pop and are called “meltdowns”.
We have three primary mechanisms for spending future other people’s money.
The Federal Reserve
The U.S. Government
Banks
Don’t want any more financial crisis? The minimum needed is to make banks hold reasonable reserves of collateral to their outstanding loans. Maybe 7 to 1. 15 to 1, as some banks got to later in the stages of this current meltdown, is too much leverage and systemic risk.
Another simple change is to make banks face risk for loans they sell that don’t perform. Do not force, or incentivize banks to loan to bad risks. Do not use banks for lame attempts at social reform / “spreading the wealth”. Eliminate government backed deposit insurance because it makes people and banks too careless with money. Do not bailout banks or their depositors. Make a bank something you want to trust, like an insurance company.
So that eliminates future meltdowns. Not hard right?
Okay, now the hard one. How do we fix the current one? This becomes, quickly, a “who gets smacked” question.
My preference? Reward those who were prudent. Let those who went crazy with future, other people’s money, pay. That includes financiers (by not bailing them out). That includes home buyers who used funky mortgages. And that includes banks that issued those mortgages and didn’t hold them.
My “meltdown” handling plan socks it to the reckless:
- Eliminate all Fannie Mae transactions over the last 8 years and devolve them back to their issuing institutions.
- Eliminate any bailouts for banks or other financial institutions.
- Eliminate government backed deposit insurance.
- Make home losses from short sales/ foreclosures taxable income to their borrowers.
They speculated and lost. Pay up.
If you were part of the problem, pay up. If you weren’t, you will suffer indirectly, but at least you know you weren’t part of the problem.
It will be ugly. And the details can vary. But if you reward the prudent, and punish those who took excessive risk at the public weal, then you will solve the crisis in a fair manner with the SIDE BENEFIT of minimizing future financial risks. Once burned, twice shy.
Now…. when I look at what we’ve done, we’ve essentially done the opposite. We rewarded the risk takers, kept in place the systems causing the systemic risk (mainly government rules and entities), and through QE2 and other measures are punishing those that saved for their future rather than borrowed from it.
Pretty dumb. But, also, alas, as we work through our nations problem solving we will find it pretty typical that the response is exactly opposite of the right way forward.