My Proposal to End the Credit Crisis and Minimize Damage to the Real Economy

We have been trying to put out one fire after another and it is time to get ahead of the problem. 

One day it is money market funds, the next is Washington Mutual, and TARP over the weekend. We need a comprehensive set of policies and I hope my proposals are a step in that direction.

 

It is unrealistic to think that we can continue to call on Citi and JPMorgan.

I argue that the crisis will not be solved by the current $700 billion proposal alone. My proposals focus on the implementation of the $700 billion plan, the recapitalization of the FDIC, a new fund specifically designed to jump start the credit system as well as proposals for both consumer and business loans.

The latest version of the proposal is available at

http://faculty.fuqua.duke.edu/~charvey/Crisis/Harvey-v3.pdf

Here is the summary:

Proposal

  1. Treasury should not pay “hold to maturity” prices for troubled assets. The price should be set in between the firesale and hold to maturity. This insures a fair price for both the government and the financial institution.
  2. Management of TARP assets should not be outsourced.
  3. Recapitalize the FDIC both in anticipation of future failures and to instill confidence among depositors.
  4. Immediately increase the FDIC maximum insured amount to $300,000 to reduce the chance of bank runs by large depositors.
  5. Fed/Treasury needs to quickly put in place the staff to handle 750-1,000 bank failures.
  6. Reestablish the Resolution Trust Corporation. This entity is mandated to dispose of assets of failed financial institutions.
  7. Establish a Bank Capitalization Fund (BCF) with the goal of purchasing 2% of the equity of all viable financial institutions.
  8. Immediately fund the BCF with $500 billion.
  9. BCF should expire in seven years.
  10. Government incented principal resets of mortgages. Resets determined by banks and both have the option to recover some of the reset if house price appreciates.
  11. Two year moratorium on mortgage prepayment penalties.
  12. Explicit quid pro quo for banks participating in TARP that credit should not be cut off from non-financial companies, particularly, small and medium sized companies that are the engine of growth and jobs in our economy.
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