Bob Williams

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance… Cicero, 55 B.C.

The stunning financial events of recent weeks are assuring us that we will endure a recession that will last for a while. Some businesses will go under, perhaps millions of jobs lost, and fear and uncertainty will dominate the capital markets and individual lives.

The Department of Treasury is starting to buy non-voting, senior preferred stock from some of the nation’s healthiest banks with orders to “deploy” the money in the lending markets. This is certainly a better plan than the original—to buy worthless mortgages from less healthy banks—but it might have been avoided if less complicated strategies had been deployed during this difficult time.

Six steps could have been taken that, in combination, might well have been adequate to restore stability in the credit markets. As Steve Forbes said on Fox News a few days ago, there is plenty of money in the system, but it is like a dam that has its pipes clogged. We need to unclog the pipes.

In my opinion, here’s how we can do that.

1) Repeal the Community Reinvestment Act, securitization of sub-prime mortgages and other legislation that forced banks to make loans to people who are poor credit risks. These junk loans are at the root of today’s problems. If government is going to force banks to make horrible loans, government can’t be surprised when the whole deal goes sour.

2) Consider suspending or modifying the “mark-to-market” accounting rule that was put into place in reaction to the Enron scandal. Essentially the rule requires assets to be accounted for at their present day value, not what they might have worth six months ago. With housing prices dropping, those assets are less valuable today than they were before. One banker we talked to, who essentially supports mark-to-market, said a suspension of the rule for six to eighteen months is a good idea because, “there is no market today.” Others I have spoken to say this simple change to an arbitrary rule could solve as much as 70 percent of the problem all by itself.

3) Congress should eliminate the capital gains tax. Astonishingly, Sen. Barack Obama proposes to raise it, draining much needed job-creating capital from the system. Until Congress gets around to doing the right thing, Treasury should redefine capital gains to reflect inflation. The Wall Street Journal’s John Fund and Americans for Tax Reform’s Grover Norquist both point out that capital gains are not always what they appear to be. For example, you buy some stock at $100 per share, hold it for five years and then resell it for $150. It looks like a $50 per share capital gain, but inflation has eroded part of that. But you will pay taxes on the entire gain.

4) Consider temporarily suspending short selling. The Securities and Exchange Commission can do this. (Long-term suspension might create a worse problem down the line.) You might remember that President Nixon’s artificial price control regime in the early 1970s set the stage for President Ford’s awful “Whip Inflation Now” program in the mid-70s and the hyperinflation of the late 1970s and early 1980’s. However, a temporary suspension of short selling could give us some time for some normalcy to return to the credit markets so that we can begin to turn things around.

5) Allow companies to bring their foreign earnings home and invest them in troubled assets. As it is, companies currently pay taxes in other countries where they do business. If they bring those earnings home, they have to pay the additional U.S. income tax. It’s important to remember that the U.S. has a 35 percent corporate tax rate—the highest in the Western world. This is a real impediment to competing internationally.

6) It might seem like a small thing that affects relatively few people, but we should suspend the rule that requires individuals turning 70 ½ years old to begin using their IRAs. Why should we force these people to start cashing in on their portfolios that likely lost a great deal of value recently?

We need greater transparency in the entire system. Federal agencies like the Department of Treasury, FDIC, SEC, and the Federal Reserve need to be more transparent. And we certainly need an exit strategy for all of the financial socialization that is occurring during the bailout process. Treasury Secretary Hank “I’ve-got-a-new-plan-every-day” Paulson, and his successor, need to devise a plan that gets government out of the way.

And Fannie Mae and Freddie Mac need to be privatized.

One more thing, as much as I dislike special prosecutors, we need one in this case. Investigate the predatory lenders and anybody else in the private sector that is culpable. Investigate members of Congress and the agencies they oversee. Not only do we need to unclog the dam, we need to clean up the corruption.

We need to rebuild our country. It belongs to us.