The Economy: Where are we now and what should be done?

[Master of Ossus]

4. Perhaps in compensation for 3, they could've liberalized application of tax rules (if only for the time being) on the realization of losses.

This has been done already, which is how Wells Fargo got something like $18 billion in future tax write-offs when they bought Wachovia for $15 billion or so. I could be off a couple billion either way, but I'm 100% sure that they got more in write-offs than the cost of the purchase.

That rule was done away with immediately, though; it only existed to get Wells to buy Wachovia. Then Congress got to make a big stink about how horrible it was, and the politically less-vulnerable IRS "had" to take the fall... for doing what Congress almost certainly wanted, originally. A special one-time-only sale isn't what I was talking about--I wanted something broader and available for lots of firms in lots of industries.

[J]

Something in between seems to be a bit more responsible: try to cushion the pain as much as possible, without going so far that we actually replicating the same foolishness that got us into this mess. Absorb some of the pain now, push some of it into the future. Unfortunately, in a society which divides up all ideas into two polarized camps, this comes off as wishy-washy do-nothing hem-hawing indecisive weakness.

Unfortunately I feel we no longer have the option of pushing much of the pain into the future, last year or even up to around Obama's inauguration we still had the time & money to both cushion the crash and postpone some of the pain into future years. Since then we've wasted around a year lying to the people and proclaiming the turnaround will come in 3-6 months while wasting trillions in bailouts, backdoor payoffs, and other absolutely useless programs to prop up a zombie financial industry without doing anything to help the people. Nothing's been fixed, all the fundamental problems are still there and worse than they were a year ago, for one thing the FDIC is now insolvent so they can only close down dinky little banks, if one of the larger regionals such as Fifth Third fails the FDIC won't be able to cover the depositors.

To pay for putting things off we need to borrow a lot of money which means lots of Treasury bond auctions, so far the bond market has held together with lots of behind the scenes work and backdoor buy-offs. Going by the results of auctions in the last 6 months or so the market is just about saturated so it's going to become increasingly difficult to borrow more money to push the pain to the future. We're also running out of time since the recovery isn't happening and unemployment & poverty become worse with each passing month, if everyone had to take a 20% hit to their wealth a year ago it would suck, but not nearly as much as 20% hit right now which would decimate god knows how many million people, we have a lot more people right now who are just barely hanging on compared to a year ago and this is only going to get worse.

There's a lot that needs to be done, I'd start with yanking all the bailouts, freebies, and liquidity measures from the banks and putting it straight into social support programs & the FDIC's insurance fund. This will crash the economy and result in all the major US banks failing overnight, but that's ok, the deposits are fully covered and can be moved to a local or regional bank. People who lose their jobs or are otherwise impoverished will have the new social support programs to cover them so they won't lose everything and end up in tent cities. From there we rebuild, I personally favour a massive nuclear energy & railway infrastructure program, which could easily be paid for with the $23 trillion or so that the US has committed to the financial industry bailout.

As for the banking industry, rather than attacking any particular banks we should just put some harsh new rules into place, cracking down on speculative investing in general and particularly things like naked short-selling, computerized trend trading, etc. The computerized trend trading leads to a classic example of what a control systems engineer would call an underdamped system. Not that a typical MBA would have any idea what that means. Strict segregation of different financial and commodities markets from each other should also be restored, as well as rules on how much capital a bank must have, etc. Basically bring a fuckton of harsh regulations down on the banks and investment firms: all of them, not just the few that we're pissed off at. Also, raise taxes sharply on investment income. The tax structure should favour people who actually work for their money, not people who acquire it by fucking around with the financial system or having rich parents.

We just need to roll back the clock about 25 years since almost all those laws were in place already, but more importantly, we need absolutely draconian enforcement of the rules & regulations. Right now we have hundreds if not thousands of regulations being broken by the financials yet bernie Madoff is the only one who's been convicted and going to jail? Ridiculous. Many of the execs of large US financials have perjured themselves in front of the Senate Finance Committee regarding their totally illegal actions and they're all still walking free. It's not just them, it's also all the people who forged mortgage documents, falsified incomes & appraisals, and committed all sorts of loan fraud, they should be serving time or paying large fines as well.

[Dave]

There's a lot that needs to be done, I'd start with yanking all the bailouts, freebies, and liquidity measures from the banks and putting it straight into social support programs & the FDIC's insurance fund. This will crash the economy and result in all the major US banks failing overnight, but that's ok, the deposits are fully covered and can be moved to a local or regional bank. People who lose their jobs or are otherwise impoverished will have the new social support programs to cover them so they won't lose everything and end up in tent cities. [snip rebuild]

Are you fucking kidding me? I may not know that much about how this all works (disclaimer: I am an Information Science student getting a minor in Business and Comp Sci, and all my assets are in a smallish local bank in Missouri) but I'm pretty sure that's not going to work as fast or as well as you want it to. The economy running into a brick wall like that is going to cause a lot even more people to slip through the cracks.

I mean, I can see dismantling massive bad banks one at a time, but I think causing Spontaneous Existence Failure of every bank we just propped up would cause EVERYTHING (and I mean every service, good, etc) to come to a screaming halt and leave millions (maybe billions, once one considers the global impact) in the lurch, maybe for months.

[J]

I mean, I can see dismantling massive bad banks one at a time, but I think causing Spontaneous Existence Failure of every bank we just propped up would cause EVERYTHING (and I mean every service, good, etc) to come to a screaming halt and leave millions (maybe billions, once one considers the global impact) in the lurch, maybe for months.

Problem: There's no way to dismantle Bank of America, JPM-Chase, Wells-Fargo or Citigroup without causing the entire system to collapse. As soon as you try to take apart any one of the above it triggers the credit default swaps & other derivatives contracts which means the counterparties, that is the other financials will now be on the hook for at least several hundred billion dollars. Which they don't have. The entire system dominos anyway. (sidenote, now you know why Warren Buffett refers to them as "weapons of mass destruction") Now you might be thinking "what if we void all those contracts first before taking down the banks?" Problem here is those contracts have a value on them which the banks hold as an asset, void the contracts and once again the banks take a loss in the few hundred billion range and they're just as dead as in the above. To engineer a soft landing at this point would take a string of major miracles. Either that or we print up a few more trillion for the banks and hope to god that the currency & bond markets do not go out of joint (a miracle in itself) and result in the Iceland model.

[Dave]

Problem: There's no way to dismantle Bank of America, JPM-Chase, Wells-Fargo or Citigroup without causing the entire system to collapse. As soon as you try to take apart any one of the above it triggers the credit default swaps & other derivatives contracts which means the counterparties, that is the other financials will now be on the hook for at least several hundred billion dollars. Which they don't have. The entire system dominos anyway. (sidenote, now you know why Warren Buffett refers to them as "weapons of mass destruction") Now you might be thinking "what if we void all those contracts first before taking down the banks?" Problem here is those contracts have a value on them which the banks hold as an asset, void the contracts and once again the banks take a loss in the few hundred billion range and they're just as dead as in the above. To engineer a soft landing at this point would take a string of major miracles. Either that or we print up a few more trillion for the banks and hope to god that the currency & bond markets do not go out of joint (a miracle in itself) and result in the Iceland model.

Hmm...
Two questions:
1) What are the consequences of doing "nothing" at this point in time? (That is, just let things keep going from here?)
2) If all the top banks are interdependent, can we bind them all together as one massive corporation?
(Yes, I know this would be a bear to engineer in and of itself, and would take years to set straight.) Would this help control things if (or when) the massive banks start to go under?

My thinking goes that if you put all of them in the same box, then audit the daylights (or, more accurately, the shadows and skeletons-in-the-closet) out of the new corporation, maybe it won't "spill out of the box" too badly when it melts down to its proper size.

EDIT: grammar

[J]

Hmm...
Two questions:
1) What are the consequences of doing "nothing" at this point in time? (That is, just let things keep going from here?)

Things continue getting worse for the people, unemployment continues climbing & pay + hours worked continue falling. Luxury goods become cheaper while essentials become more expensive. This continues for an unknown amount of time until the bond and currency markets lose confidence in America at which point interest rates on everything go sky high, the US dollar takes a dive, the US government loses its ability to borrow money, and the budget must either be cut in half or they'll have to print up a whole lot of dollars on top of what they're already printing, further devaluing the USD. International trade suffers a stroke as everyone tries to revalue their contracts in terms of a collapsing USD, quite a few import/export & shipping companies will be bankrupted and goods will be stranded on ships & dockyards. And while this is going on you have a full-on economic collapse.

2) If all the top banks are interdependent, can we bind them all together as one massive corporation?
(Yes, I know this would be a bear to engineer in and of itself, and would take years to set straight.) Would this help control things if (or when) the massive banks start to go under?

My thinking goes that if you put all of them in the same box, then audit the daylights (or, more accurately, the shadows and skeletons-in-the-closet) out of the new corporation, maybe it won't "spill out of the box" too badly when it melts down to its proper size.

It might be possible if the problem were limited to US banks and the US banks do not have any interdependence with foreign banks; in which case the banks could be merged & nationalized with the losses spread out over the next 50 years. Unfortunately neither of the above is true. The bank problem is worldwide, UK and European banks are even worse off than American ones in many cases and they're all interdependent. Merging & auditing the banks in the US will blow up half the banks in the UK which sets off a chain of failures in Europe. Now we have a financial & economic collapse in most of the 1st world, Canada is sunk by the US and I think Australia & New Zealand are the only countries which might get away relatively unscathed.

[Dave]

[snip]

OK, so then what you're claiming saying, is that yanking the supports back out and dumping it into the FDIC and social services is actually less painful for the people of the United States than a longer, drawn-out collapse? That less people will be trampled underfoot?

Secondly (and relatedly), would I have been correct in my assertion that the resultant collapse of the major banks would leave millions of people in the lurch, with minimal or no access to their money in the bank?

Wouldn't this cause them to require the assistance of the aforementioned social services?

If so, do you really think that the social services will be able to assist them fast enough, even with the sudden influx of money? (I'm not talking about "government inefficiency", I'm talking about simple inertia.) I find that claim difficult to believe.

[J]

OK, so then what you're claiming saying, is that yanking the supports back out and dumping it into the FDIC and social services is actually less painful for the people of the United States than a longer, drawn-out collapse? That less people will be trampled underfoot?

Yes. If we continue as is it means countless billions of dollars will continue to be poured into the banking system every year, money which is then not be available to cushion the collapse for the people. It's basically throwing away vast amounts of borrowed money to buy a little bit of time in hopes that the economy will pick up before being crushed by the debtload of borrowing the money. Think of it as giving a drug junkie one last fix so you can calm him down enough to drag him to detox, if you can get there in time, great, if not then the junkie's going to be in even worse shape than before.

If we have a decent estimate of when the recovery should start and we address the fundamental problems which caused the recession at the same time, then it's ok to apply stimulus & spending packages to tide things over and kickstart the recovery a bit earlier. But we don't. As long as the fundamental problems aren't fixed, and they aren't, we cannot have a recovery. If everything were magically fixed right now and the banks were all made solvent & well capitalized we'd still have 2-3 years to go before we begin a durable recovery, that's how long it'll take to clear out the remaining bad mortgages & loans from the system.

Secondly (and relatedly), would I have been correct in my assertion that the resultant collapse of the major banks would leave millions of people in the lurch, with minimal or no access to their money in the bank?

Wouldn't this cause them to require the assistance of the aforementioned social services?

Yes. But this can be mitigated to some degree with a bank holiday to give everyone the time needed to sort out accounts, this was done during the Great Depression to help prevent bank runs. In short, all the banks are closed down for a week while they're FDIC'd, at the end of the week we end up with a few smaller Federal banks, existing account holders at the now dead banks have their accounts transfered to the Federal banks along with payrolls & so forth. Obviously this won't be seamless and some people will lose access to their money during the changeover, however if Citigroup for example goes under next week it will lock out a lot more people from their accounts for a longer period of time than a Government declared bank holiday.

If so, do you really think that the social services will be able to assist them fast enough, even with the sudden influx of money? (I'm not talking about "government inefficiency", I'm talking about simple inertia.) I find that claim difficult to believe.

It won't. They will however be able to anticipate demand to some extent if everything's setup ahead of time as best as can be. If we continue as is, the collapse, when it happens, will catch everyone off guard and leave social services up the creek in a leaking boat without a paddle nor a bailing bucket.