richard_nogginn

Will Government Spending Work?

First of all. The USG has to lose the idea they can wallpaper over a trust problem by printing new dollars. It causes more problems than it cures and there are trillions of dollars not being invested until trust is addressed. The USG has to lose the idea they can create jobs. That will work for a short time.

The truth is that banking has an entire section of the federal code of regulations (12CFR) they are supposed to adhere to. That means they are already tightly regulated. The Bush administration either winked and nodded when banks did not follow regulation or they were negligent in the duties and responsibilities of a regulator. It was the gross failure of our government to perform its oversight duties that got us here.

Therefore in order to regain investor trust three things have to occur: any bad assets must be assigned fair value, a place to store the bad assets must be provided, and the government needs to profile bank or banks that violated their regulatory boundaries.

A reverse auction is the fastest way to assign fair value and provide a means for treasury to purchase the assets at fair value. Each bank has to value their bad assets and treasury purchases those of lowest value/market segment. During the S and L crisis of the 1980's the federal home banks were used to store bad assets. Since that precedent has been set, they need to be used in that capacity again. When investors see these assets at fair value they should start competing with treasury, so not all bad assets will wind up at auction.

Finally in order to assure the rest of the world that the USG will ensure banks comply with regulation, one or more banks will have to be slapped in public. Again the keys:
force banks to evalutate their bad assets fairly via reverse auction
use federal home loan banks to store some of the bad assets
allow investors to compete once they see fair value is being assigned
ensure public is aware that bankers are being punished for violating regulation.