No One Has Any Idea How To Solve Economic Crisis: No One Even Has A Good Proposal

Elvis Has Left the Mountain

By THOMAS L. FRIEDMAN
Published: January 31, 2009

DAVOS, Switzerland

http://www.nytimes.com/2009/02/01/opinion/01friedman.html?em

In its own unpredictable way, the Davos World Economic Forum usually serves as a crude barometer of the latest mood or mania on the world stage. This year did not disappoint. What has struck me is the quiet urgency that infused so many panel discussions and private conversations here between investors, politicians and social activists. To put it crudely: everyone is looking for the guy — the guy who can tell you exactly what ails the world’s financial system, exactly how we get out of this mess and exactly what you should be doing to protect your savings.

But here’s what’s really scary: the guy isn’t here. He’s left the building. Elvis has left the mountain. Get used to it.

What do I mean? First, if it is not apparent to you yet, it will be soon: there is no magic bullet for this economic crisis, no magic bailout package, no magic stimulus. We have woven such a tangled financial mess with subprime mortgages wrapped in complex bonds and derivatives, pumped up with leverage, and then globalized to the far corners of the earth that, much as we want to think this will soon be over, that is highly unlikely.

We are going to have to learn to live with a lot more uncertainty for a lot longer than our generation has ever experienced. We keep pouring money into the dark banking hole of this crisis, desperately hoping that we will hear it hit bottom and start to pile up. But so far, as hard as we listen, we can’t hear a thing. And so we keep pouring ...

A broker friend told me it reminded him of when he was a teenager and his doctor first diagnosed him as unable to digest wheat products. He said to the doctor, “Well, just give me a pill.” And the doctor told him: there is no pill. “You mean I’m just going to have to live with this?” he asked. That’s us. There is no pill — not for this mess.

The fact that there is no single pill doesn’t mean there’s nothing to be done. We need a stimulus big enough to create more jobs. We need to remove toxic assets from bank balance sheets. We need the Treasury to close the insolvent banks, merge the weak ones and strengthen the healthy few. And we need to do each one right. But even then, the turnaround will be neither quick nor painless. Indeed, the whispers here were that what has been an exclusively economic crisis up to now may soon morph into a domino of political crises — as happened in Iceland, where the bankruptcy of the banks toppled the government on Monday.

(Davos humor: What is the capital of Iceland? Answer: $25.)

Second, we’re going to have to get used to a loss of trust. All those rock-solid people and institutions that we trusted with our money, our pensions and our kids’ piggybank savings — like Citigroup, Merrill Lynch, Bank of America — do not seem trustworthy anymore. Never before in my adult life have I looked around at every bank in my town and said, “I’m not sure I wouldn’t prefer to put my paycheck in a mattress.”

The Bernard Madoff scandal, of course, has only reinforced that loss of trust. His degree of betrayal — his alleged willingness to embezzle the life savings of people whom he had known his whole life — is so coldhearted that it charts new territory in human behavior. He’s on his way to becoming an adjective. Money managers are already being asked prove to prospective new clients that their internal safeguards are “Madoff proof.”

I’ve written a lot about the Indian outsourcing community, so I knew B. Ramalinga Raju, the Satyam chairman accused of embezzling $1 billion from his own company. What’s really sad is that I didn’t get to know him through his business but through an interest in his family’s charitable work. They created India’s first 911 emergency system in their home state and call centers in Indian villages, so young people there could get service jobs. Was all that a fake, too? Or was he just an embezzler with a good heart? Don’t know. When you can’t even trust a person’s charitable work, you’ve hit a new low.

“We’re all going to have to learn to live with a lower level of trust in our lives,” an African banker friend said to me here. But the mind recoils at that, which may explain why so many people I talked to here are hoping that President Obama will turn out to be the guy.

Like Harry Truman, Obama is definitely present at the creation of something. He is arriving on the scene “not after a war but after the same kind of shattering of institutions that a war does,” said Peter Schwartz, chairman of the Global Business Network. “His job is to restore confidence to these institutions that have been at the foundation of our economy.”

That may be President Obama’s most important bailout task: to educate the country that there is no easy escape here, except taking our medicine, getting our fundamentals right again and working our way out of this, brick by brick, by getting back to making money — what was that old Smith Barney ad? — “the old-fashioned way” — by earning it.

 

Where the heck are the Medici and Rathskellers when you need them???

 

Sorry, I meant the Rockefellers!!!

Oh yeh, add the Rothchilds; however, they should be TOP on the list.

 

MAN:::

Economic Crises, Earthquakes, Famines, Pestilence, Droughts, Disease; we're all DOOMED

Heck, that's the Third Horseman.

You're right, we've got our families, most are in better health than any of our forefathers. We're learning and personally growing, What doesn't kill you makes you stronger and SMARTER.

We as Americans have turned into little SPOILED BRATS.

Most people don't even know what its like to do manual LABOR. But I guess that's pretty hard with a silver spoon in your mouth!!!

 

here's one good idea.

http://www.cnbc.com/id/15840232?video=880299290&play=1

 

Friedman doing his lackey job of pushing the message of the socialist elites.

The elites weren't trying to save the world, they are trying to save their interests, and power base.

We need to suffer, we need to get used dealing with this mess. Mean while, the politicians continue to make six figures, plus perks, and millions in slush funds.

The bankers were able to make their trip to Davos.

The only people asking for magic bullets, which is really just your hard earned savings and money are the bankers and politicians. At least in the US the public has been against, magic bullets, TARP, stimlus, etc.

Yes the message to the masses is, thanks for the money, you saved our businesses but now you need get used to eating dog food.

I don't think these people realize that the masses are about to start dragging them from their gilded houses.

 

lrm21,

However, you do have a GOOD point!

 

Here's my plan, just CC'd to Obama and the rest.


Dear President Obama, Treasury Secretary Geithner, Ben Bernanke, and all members of congress.

My name is Michael Krause, a resident of San Diego, California. I want to propose a relatively simple solution to the credit and economic mess we are in. It is a two part solution that attempts to balance moral hazard with proper incentive, all while aiding the global macroeconomic environment to reinvigorate lending. This is a realistic alternative to injecting another several trillion dollars into the banking system, which is what is truly necessary if we are to avoid a deflationary spiral and government revenue crunch.

We need to create a "National Refinance Bank." In many ways, this could be analogized to a "bad bank," but the plan is simpler and not just targeting "bad assets." The idea is to create a one stop shop to refinance all residential mortgage debt at a fixed rate of best choice, perhaps 3-4%. It would refinance indiscriminately, no matter the present income qualifications or the amount underwater a property might potentially be. This solves a big present problem that self-reinforces the housing rout we are in, where homeowners on the margin cannot get loans. We MUST eliminate the negative feedback loop if we are to make progress. This refinance process would pay off all loans to the originating banks (and/or Federal agencies Fannie Mae or Freddie Mac effectively), making all mortgage and home equity loan assets held on bank balance sheets worth par. As well, all derivatives (ie credit default swaps on such debt) would likely beneficially change in value as well. The National Refinance Bank would hold every refinanced security to final payoff. At payoff (in 30 years), the national refinance bank as well as the money the fed created for it to lend would cease to exist.

There is an additional macroeconomic benefit of much lower interest rate payments for borrowers (3%, lets say) as acting as a stimulus itself, as personal disposable incomes, especially within the middle class, will increase equivalent to a tax cut.

Additionally, a sister program should be created similarly to refinance all commercial real estate debt coming due in a similar fashion, regardless of current credit status, extending balloon mortgage periods for another decade. This would prevent an ensuing crash in commercial real estate, and stop the self-reinforcing spiral of losses banks are currently dealing with.

Where would the money come from? Much of it would have to be created out of thin air, just as the Federal Reserve will do with the present program to buy $500B of agency securities. Plenty of this refinancing will make Fannie Mae loans whole, returning these agency investors their funds, so it is sensible that an equal amount of US treasury debt will be able to be created without crowding out investment for other asset classes. This is important, as investment flows must not be crowded out.

With this proposal, banks would be made whole on most assets worth 0 or near it, and would now be sufficiently capitalized to lend. In fact, much of previous TARP funds will be able to be paid back to the treasury (as the new source of capitalization will give banks no incentive to keep preferred obligations on their books). The loans and excess money the government prints to do this, while being inflationary, will be structured to disappear as borrowers pay off their obligations. Just as much of new Federal reserve credit programs are "self-mopping" as the obligations are paid off by borrowers, so is this plan. It just requires a massive scale of lending, which as we all know is clearly necessary to stabilize and fix this problem. Since a final effective solution to this crisis will provide confidence in our system to foreign and local investors, I believe it will not destabilize the dollar nor result in a treasury selloff. This new printed money should not fuel a new bubble or hyperinflationary round driven by credit for the next reason I point out.

The second part of the plan is designed (and of course needs to be refined) to fix the problem of moral hazard by 'bailing out' all of the bad decisions of the past. We've made mistakes, and need to to learn from them. The idea is to change the bankruptcy law to disincentivize people from taking risks with money they know there is a large probability they cannot pay back to their creditors. My idea is to extend the period of credit recovery and ability to buy a house from 7 years to 15 years, and create a mandatory work program to make bankruptcy become very unattractive. If you choose to go bankrupt, you must work 16 hours (2 work days) every other weekend for a period of 4 years. These roles could include military work, nursing home and hospital labor, construction, security, or almost anything the government needs. The children of single parents who are in this program could be taken care of by other participants in the program (a group child care job). As an extension to the idea, the government could even resell this labor pool at slightly below market rate to the private sector, using it as a source of revenue.

The idea here is attach a meaningful penalty to making financially irresponsible decisions. Prison is no appropriate place for most debtors, and costs the taxpayer too much. As such, we should teach financial common sense in our schools. Many young adults are simply not prepared for the real world challenges in understanding budgeting, how to deal with credit, mortgages, and the rest. These concepts need to be taught at a young age if we are to have a future generation of responsible members of society. The idea is not that we create a whole work core of bankrupt deadbeats, but that we avoid this destiny by having knowledge and being prepared. Prison for bankrupt people is not a good idea, as it does not productively use their labor capital, nor measurably equate to the severity of their 'crime.' 2-4 years of every other weekend could be viewed as a repayment program, and does not create unintended consequences of expected work entitlement, salary demand, or private sector job dislocation, such as a full time program. This would be a 'bankrupt worker reserve program'.

In private business, the problem of CEOs and managers taking large compensation for horrible short term decisions can be remedied as well, by merely requiring all performance compensation to match the longevity of the investment made. If a bank manager or trade is to buy a 10 year security, his performance compensation should come to fruition at the end of the period, just as a private investor has to worry about his capital coming back. Aligning the shareholder and the worker/decision-maker in a company is the goal, and the broken and flawed incentive structures we have today can easily be improved. This is another direction, one that is outside the scope of this letter for the same of practicality. I considered it worth mentioning as the contents of this letter may prompt the reader to probe the unaddressed issue of how we deal with corporate decision-making processes and bankruptcy in a way that does not remove the spirit of entrepreneurial capitalism from our great country.

In summary, my plan seeks to balance the benefit to our credit and banking system with the benefit to the debt-laden member of society, while creating a disincentive to repeat the mistakes of the past. There have been poor decisions made, and even this plan may reward debtors and give them a second chance. Many will have a moral problem with this. The new bankruptcy proposal seeks to somewhat resolve this. Regardless, we need to move forward, and any time we spend in anger and delay for the sake of avoiding help to any one group who made poor decisions will merely make life worse for all members of the global society we live in. We need to collectively sacrifice our pride and move on and build a better future. I am hopefully your leadership can effectively persuade everyone to do this.

 

Impact of Davos on stock market & economy: 0

 

The balance in your account after buying POT, MOS, RIMM & many other high multiple stocks at their all time highs...