Bailout Nation (46 page)

However, Scott argues that it is a necessary evil: “Pushing the big banks (and AIG needs to go there as well) into fully nationalized mode doesn't solve our problems by any means; it is merely the first step—but a step without which we can't make much progress—along a very difficult road. The extent of the deleveraging that we have to undergo, not simply among the banks, but by households and nonfinancial corporations as well, will take years to happen under the best of circumstances. My goal is putting banks in a position from which they are again able to lend.”

On a related note, Robert Lenzner of
Forbes
suggests: “Get together a FASB-like institution for the SEC; populate it with wise men and lions with no axes to grind, such as Paul Volcker, Felix Rohatyn, and John Whitehead; and decide how to handle the treatment of the bank losses.”

S
tock Trader Almanac
editor Jeffrey Hirsch suggests a Manhattan Project for energy technology. We have seen only incremental improvements in technologies, such as battery storage, solar energy conversion, and internal combustion efficiency. What we need is a breakthrough on a fundamental physics level—the sort of thing that only government can fund over long periods of time.

Silicon Valley executive Jeff Weitzman (Yahoo!, Coupons.com) adds, “With the billions that we dumped into AIG alone we could, for example, transform the solar industry: Subsidizing solar panel installations would at once pump money directly into the economy in the short term, significantly reduce our reliance on imported energy in the medium term, and push solar over the line of grid parity cost-effectiveness, creating a domestic industry that will
export
energy-producing equipment and create jobs in research, engineering, manufacturing, and more. We have to spend enough to send these industries into overdrive, setting ourselves on a course to transform our economy in a relatively short period of time.”

Brian Gongol is a sales engineer, small-business owner, and radio talk show host. He thinks we can jump-start the nation's innovative energy entrepreneurs via inducement prizes. He wants the government (or a wealthy private benefactor) to offer $1 billion cash prizes for each of these energy innovations:

For a billion dollars each, it's virtually certain that someone or some organization would enthusiastically start seeking answers to each of these questions. The results would concentrate the diffuse social benefits of positive discoveries.

The simplest idea comes from James Altucher, managing partner, Formula Capital. James suggests: “No income taxes for one year. It's the most immediate way to make people feel wealthier and give them more confidence in the economy. The result will be new businesses started, a return of the multiplier effect in the economy, and over time much greater tax revenues.”

N
ed Davis (of Ned Davis Research) notes, “If President Obama wants to follow through on his pledge of fundamental change and trickle-up economic theory, I would have the government increase fixed investment in proven technologies with visible multipliers, and work with other countries to improve trade and financial stability, instead of providing bailouts. By putting out the prospect of new jobs, the government will help the future look more hopeful.”

A few of Ned's ideas are:

Ned's bottom line is that a very strong correlation exists between gross domestic investment and nominal gross domestic product (GDP) (see
Figure PS.1
). If we need more stimulus, let it be directed toward needed investment, not bailouts.

Figure PS.1
Investment and Nominal Changes (Five-Year Percent Changes)

SOURCE: Courtesy of Ned Davis Research

An overlooked economic fix would be to help the cash-starved state and local governments. That idea comes from David Rosenberg, the North American economist for Merrill Lynch. In a recent missive to Merrill's clients, David noted that “the economy is in dire need of a major positive exogenous shock.” His idea: “The White House should instruct Congress to dole out a $1 trillion zero percent long-term loan to the beleaguered state and local governments that are being forced to cut back services and raise taxes at the worst possible time. What is not open for debate is the state of the economy, and we can no longer just label this a recession after the latest string of shockingly negative employment reports. The government has to declare war right now
. . .
against this modern-day depression.”

Jim Welsh concurs, noting that the primary focus of any federal government program should be to spend money on projects that will have the greatest multiplier effect. In the second quarter of 2008, the government spent more than $100 billion on rebate checks for individuals. Best estimates were that consumers spent only 20 cents of each $1 distributed, meaning the economy didn't get much of a boost. Spending on infrastructure projects, such as bridge and road repair, has historically generated more than $1 of economic activity for each $1 spent. I'm sure economists will be able to provide the Obama administration specific spending ideas that have the greatest multiplier effect.

Portfolio manager Carl Haefling suggests the Fed and Treasury “allow anyone in the nation who has a mortgage that is current to refinance the mortgage without fees at 4.5 percent for 30 years. This would be equal to a tax cut for large numbers of people. It could help stabilize the housing market and prevent more inventory being created. It would be offered one time only and available only for a designated period of time. (As long as we are considering government-guaranteed loans, we could also extend the low-interest-rate offer to well-qualified car buyers. That, or providing a $2,000 new car purchase tax credit would also add some activity to a weak section of the economy.)

Richard Lang, executive director of the Virtual Country Foundation, suggests that the United States “fund four years of public college education for every student in high school with at least a B average. This was calculated a few years ago at $35 billion. That sounded like too much money back then, but it seems like nothing now. It will provide a motivator for students to achieve reasonable academic goals, and the economic benefit will be felt immediately by every family with one or more children approaching college age.”

On a strictly fiscal basis, Bob Agdern, retired counsel for BP Amoco, notes this key lesson from history: We should pay heed to the sheer number of empires that became overstretched militarily and then sunk under their own weight. We need a military and intelligence system structured for the next century, not the last one. And just as important, we need to be able to size these endeavors at a level we can afford. We can't continue to subsidize the entire free world by acting as the globe's policeman.

S
everal people, including
Greenspan's Bubbles
contributor Fred Sheehan, suggested disbanding the Federal Reserve entirely. Like unilateral nuclear disarmament, I somehow doubt that is likely to happen. And Seth Daniels, research analyst, wrote: “I find it interesting that not a single person advocated a laissez-faire recommendation.”

Quite a few people had some interesting suggestions for the Fed.

David Merkel, chief economist of Finacorp Securities, who writes the Aleph Blog, notes that sometimes we have to take our medicine: “Alan Greenspan's unwillingness to allow for moderately stiff recessions led to an unsustainable buildup in the debt-to-GDP ratio.” While we can smooth out the peaks and valleys of the business cycle, trying to eliminate it totally is a fool's errand.

Peter Boockvar, market strategist at Miller Tabak, goes even further, suggesting a more European Central Bank type model: “Change the responsibilities of the Fed to solely that of price stability. Eliminate the mandate of maximum employment, as the two conflict. The optimum environment for economic growth should be on the fiscal and regulatory front. The marketplace should set the proper level of interest rates. A stable currency and thus price stability are in the direct purview of monetary policy. It was unstable monetary policy—the shifting of the fed funds rate to manipulate economic activity—that created the basis for the boom/bust economy, without which bubbles would be dramatically less likely.”

Gene Salomon is a music attorney and partner at Gang, Tyre, Ramer & Brown in Beverly Hills, whose clients include Neil Diamond, Pink, and Radiohead. Gene notes, “It has become common wisdom that we need a more robust regulatory scheme in the United States, and I agree. What is often overlooked in the discussion is the need to rebuild the regulatory agency manpower we used to have. Since the 1980s under Reagan, we have eliminated the professional civil servants necessary for regulation to work. Outsourcing has run amok and is ineffective and inefficient. Recruit and hire the best people (even if you have to pay more for them) as quickly as you can.”

Last, Paul Brodsky and Lee Quaintance, who run asset management firm QB Partners, made the following bold suggestion: Make sound money the nation's highest economic priority. If U.S. dollars were to be thought of globally as a reasonable store of wealth—not just relative to other currencies but over generations—then global economies would function far better and most if not all of the financial excesses we've been experiencing would go away. How to do that? Convert to the gold standard. (They admit that “our best ideas don't seem feasible at the moment.”)