Making a Mess Messier

After the U.S. Treasury Secretary, Henry Paulson, began to implement his “force the banks to accept overpriced federal funding” Capital Purchase Program earlier in the week, the market crashed and the American banking community cried foul, a few more wise voices chimed in to reinforce exactly how inadequate – even stupid (my words) – that plan was. Yesterday, Japan ’s Prime Minister, Taro Aso, addressed his parliament (the Diet), and described the U.S. effort: "Since it was insufficient, the market is again falling sharply."

Our own Federal Reserve heads, past and present, also seem to be realizing that this is all too little and too late. The Associated Press (on AOL on October 15, 2008), posited the following quotes: "‘I don't think we can escape damage to the real economy,’ former Federal Reserve Chairman Paul Volcker said this week in Singapore. ‘I think we almost inevitably face a considerable recession.’"

“The Fed's current chairman, Ben Bernanke, delivered a more measured, but similarly grave assessment to economists, saying the recent financial turmoil ‘may well lengthen the period of weak economic performance and further increase the risks to growth.’" Bernanke isn't raving about Paulson’s plan?! They're part of the same team! Think Paulson is the only one selling manure into the markets? There are other hair-brained schemes out there in the ether, seriously being considered as real solutions.

Try, “let’s buy up all the bad home loans from those insurance and finance companies that have no clue what to do with them and negotiate with the subprime mortgage-paying homeowners who can't pay their mortgages any more or are in default.” Brilliant! Let’s bail out big companies out of their stupid investments and begin to place the federal government into millions of individual mortgage negotiations (and credit evaluations and real estate appraisals) and do it soon to stop falling home prices. Oh, by the way, we won't help folks who are paying their mortgages and are having trouble, only the ones who took stupid loans.

Like exactly who is going to do this at the fed? A new level of bureaucrats we haven't met yet? And how are they going to do it fast anyway without a moratorium on foreclosures to give the government enough time to create a real solution? And what about the dozens of other issues, like failing credit lines that support payrolls, inter-bank lending assurances, creating a “hold” on the derivative markets, etc, etc, etc.

For those of our leaders who are brain-damaged or need a simple formula:

1. Freeze the markets as much as you can. Place a moratorium on foreclosures and restore short term bank credit confidence to get payrolls funded.

2. Prioritize and implement the short term solutions. Focus on increasing liquidity (lending capital), keeping people in their jobs, setting new livable interest rates and creating new jobs (even if they are government-sponsored infrastructure repair efforts).

3. With the understanding that this is a recession that will be with us for a lot longer than we have experienced in recent history, create a ground-up reexamination of the financial regulatory and oversight rules, sharply curtail if not eliminate exchange-traded derivatives and over-the-counter (OTC) derivatives, make over-leveraging (borrowing beyond your means) exceptionally difficult, and set in place a system of checks and balances to prevent trends based on loopholes or instruments that can survive only under sustained periods of growth (but not downturns) from being the basis of new financial instruments.

4. Apply a little RICO (civil & criminal) action to the main perpetrators and get some fat bank accounts back to the taxpayers by force of law.

It’s truly complicated, but there is one absolute in the market today: What the federal government has done so far has not worked, and the markets do not believe that the announced plans will ever work. Time for another approach. Fast!

I’m Peter Dekom, and I approve this message.