Part of the too big to fail/succeed legacy was the four banks that were inviolate: Citi, Bank of America, JP Morgan and Wells Fargo.  The Fed can’t let any of these fail, so Bank of America (what a nice name) gets extra aid, even after the almost failures of Citi and  Wachovia.

From an idealistic strandpoint, I don’t get the aid.  If aid were not available, Bank of America would have been less aggressive, and we would be moaning about the smaller Merrill and Countrywide troubles today.

But, that’s not the case.  The aid provided has perverse incentives to banks.  The more you moan, and the bigger you are, the more you get.

This will not end well.  My experience tells me that those who are dependent tend to be so, until something big jolts them back to independence.  After all, dependence is comfortable.

My friend Dr. Jeff wrote in response to one of my articles:

1. Jeff Says:
   December 21st, 20081:18 am at EditMost of the questions you ask have been answered on the public record. They are available for our evaluation.

   In the case of Lehman, the Fed could not take the collateral because it did not qualify. If they had, you would have been leading the charge in objecting. Treasury had no authority.

   In the case of AIG, there was concern about counter-party risk that extended worldwide. We got a demonstration of that from Lehman.

   I am mystified by your criticism of the Obama administration — yet to weigh in on this.

   As a careful, loyal, respectful, and interested reader of your work, I have some questions. You have been critical of elected officials, appointed officials, independent bodies — in fact — every agency of government. Just how do you think we should be setting policy?

   Is there some other country or system that is doing this better?

   Just wondering…

Look, Jeff, I feel the same way,  I hate being merely a critic.  That is one reason that I submitted many of my policy ideas to the Obama administration.  Given the limitations of their website, though, I can’t easily point to what I submitted.

Aside from China, the competitive fringe in Asia is doing better.  Aside from that, other countries are a tie at best.

But what I would propose as a solution to our current crisis is this:

If I were offered the opportunity to fix things, I would take it, and:

• Create a new RTC for the small stuff
• Create a new chapter in the bankruptcy code for Too Big To Fail institutions
• Create a means of resolving home foreclosure issues in a manner similar to Chapter 11, which would lead to more compromises.
• Institute true tax reform that eliminates the sheltering of income, and eliminates all tax preferences.
• Wind down the Fed’s current “solutions”
• Begin inflating the currency to force up the value of collateral relative to nominal debt levels

The last one I like the least, but I’m afraid it would have to be done.  Phase two would be:

• Move to a currency that is gold-backed.
• Replace the Fed with a currency board.
• Create a new unified regulator of all depositary institutions.
• Slowly raise bank capital requirements, and make them countercyclical.
• Bring all agreements onto the balance sheet with full disclosure.
• Enforce a strict separation between regulated and non-regulated financials.  No cross-ownership, no cross-lending, no derivative agreements between them.
• Bar investment banks from being publicly traded, and if regulated, with strict leverage/risk-based capital limits.
• Move back to balanced budgets, and prepare for the pensions/entitlements crisis.

That is my proposal, and it is better thought out than the politically driven drivel that occupies DC today. I am thinking longer term than most politicians do, and aiming for a society that can work in the long run.