You Want to Fix the U.S. Economy? Here’s a Start

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Johnny Oxygen's picture
Johnny Oxygen
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Posts: 1443
You Want to Fix the U.S. Economy? Here’s a Start

 

http://www.financialsense.com/contributors/charles-hugh-smith/2011/07/20...

 

Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by "last sales of nearby properties" adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors' claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1892
Alas...

There are lots of things that can be done to fix the problem, depending on what your priorities and methods are, and what you perceive the problems to be. They just won't be done. Ever.

Poet

Thomas Hedin's picture
Thomas Hedin
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Joined: Jan 28 2009
Posts: 815
anything but the real problem.

Its just more of the same ol everything but what the real problem is.

goes211's picture
goes211
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Joined: Aug 18 2008
Posts: 1114
CHS is a bit off on this one...

Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by "last sales of nearby properties" adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors' claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

I am generally a hugh fan of CHS but I think several of these are very bad ideas.

  1. Mostly a waste of time and will make little difference.  Many, if not most of these "derivatives" have no liquidity and therefore the market to market will effectively be mark to what ever they want.
  2. Great idea.  100% agree.
  3. Good idea in general but would have to do a better job than zillow which has my house over valued by more than $100K.
  4. How often do these values change?  Weekly is far too often.
  5. This one is a complete and total mess.  I have no idea how to fix it or if it can be fixed.  The overriding principle must be that those that cheated the system ( banks, homeowners, ... ) must not be the ones that reap the benefits.
  6. Seems a bit stiff but it does incentivize good behavior.
  7. The FDIC currently only takes over banks on the weekends and these are cases where they have been planning for some time.  Unplanned taking over an entity the size of a bank at the end of one day and reopening the next day is impossible!  Many of the positions that probably got the bank in trouble are going to be completely illiquid.  The "orderly maner" is going to take a lot of time.
  8. Now this one is complete and utter folly.  Most of these deriviatves positions are very illiquid and have been accumulated over many months or years.  To try and liquidate in some sort of 1 day fire sale, would be like taking a Picasso to a NYC street courner and expecting to get values like Sotheby's. 

Most of my criticism have to do with timing. 

Many of these come down to how oftern to mark things to market.  When you have to mark 100,000 illiquid things to market every day, what you will get is a big copy and paste of the previous days values.  No value will be added and only busy work will be created.  Now if these things got realistic marks monthly or ever quarterly, it would not be just creating paper work and we would be far better off than we are today.  (NOTE: Market to market on liquid assets should be done daily)

The rest come down to trying to resolve a problems too quickly.  I wish that these problems could be fixed in a fast manner but they just cannot.  Certainly the bank should immediately go into receivership but there is no way these positions can be unwound in a day.  If they did, expect the results to look like the privatization of national assets in Russia, where the Oligarchs picked up everything for pennies on the dollar and everyone else gets screwed.

kaman's picture
kaman
Status: Bronze Member (Offline)
Joined: Apr 24 2009
Posts: 51
Poet wrote: There are lots
Poet wrote:

There are lots of things that can be done to fix the problem, depending on what your priorities and methods are, and what you perceive the problems to be. They just won't be done. Ever.

Poet

^^^^^^^^^This^^^^^^^^^

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Then There's This....

JOx -

Nice dig.  Through a circuitous path (that I cannot recreate) following your original article I found this rather tongue in cheek article by Jeff Reeves. 

http://www.investorplace.com/49872/politics-debt-ceiling-federal-spending-strategic-default/?cp=msn&cc=synd

An excerpt....

Quote:

The end of the welfare state


The shutdown of government spending will serve both short-term needs in balancing the budget but address long-term budget problems we face due to the Nanny State mentality in Washington.

Take Medicare, one of the biggest causes of our current budget trouble. If we slash spending dramatically, we will not only eliminate one of the biggest drains on the U.S. Treasury, but we will also fix the nagging demographic problem caused by Baby Boomers living longer and clogging Social Security roles.

Without healthcare, surely few of our seniors will survive into old age. This will dramatically reduce both future Medicare and Social Security payouts.

These socialist programs are part of the problem. It’s time to make them part of the solution.

 

 

ewilkerson's picture
ewilkerson
Status: Gold Member (Offline)
Joined: Jul 18 2010
Posts: 390
I'm not an accountant, but

I'm not an accountant, but it seems your proposals, although good, would make most banks insolvent.  I'm afraid the banks just have too much power.

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