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Several Partial Proposed Solutions to the Economic Crisis

by Win Wenger, Ph.D.

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Part I - "A Firesale on Capital"

When tasked with finding solutions to challenging problems, most people underestimate their own ability to solve those problems and/or think those problems impossible to solve. But when presented with a plausible suggestion toward a solution and tasked with either picking apart that proposal or generating a new and better one, groups of people very quickly moved productively on into effective problem solving and generated new and better answers.

It is in that spirit that I offer this proposal, that of having a "firesale on capital." Not as an "Here's the answer, world, come and gape," but as a trigger for your own and better answers and solutions. For the matter under consideration, what matters is not whose answer is accepted but what answer does the job of solving the problem - more than that, what matters is getting the problem solved, regardless of answer. Your job is to pick the present proposition apart and/or improve on it, and/or come up with better answers. The only requirement/request I put on this is that, preferably by means of some specified problem-solving method among the hundreds now so readily available to you, you switch some of your attention from what you "know" about the problem situation, that knowledge not having solved the problem yet, and TO your current unfolding perceptions in that context, where you have the best chance of spotting the answer that WILL work.

O


Here is the problem and difficulties surrounding it:

Credit thrombosis. Our entire credit-flow system is seized up, and the bailouts are being used largely for purposes other than stopping the hemorrhaging and restarting the flow. The resulting cascade of effects is destroying not only the unsound enterprises across our landscape, but most of the sound ones as well, to such extent that the eventual contraction might well pull everyone under.

Surrounding difficulty: Putting the interests rates even lower, damages the economy. The Fed, fearing for U.S. currency and in the teeth of prospects for severe inflation, has set the interest rates as low as it dares to go and Europe, this morning (November 6, 2008), set theirs even lower, while everything everywhere continues to sink. Further, the damage already done to our currency is driving up enormously our long-term treasury rates so that our already unbearably huge long-term debt, as it recycles through maturing instruments, becomes vastly more expensive still regardless of current deficits or even corrections thereof.

An analogy to keep in mind: what a private enterprise does when it wants to move more of a good or service from its stock: it holds a sale. To make the sale more attractive to buyers, it puts a time limit on how long the special break in good prices will hold. We have each seen this done, hundreds if not thousands of times, and even understand, each of us, the reasons why and how entrepreneurs run such sales.

Proposed solution: run a fire sale on interest rates in the U.S. economy. The Fed sets rates a full percentage point or more lower than it otherwise would, FOR A PRE-ANNOUNCED TWO MONTHS ONLY.

Aspects:

  • Pre-announcing, and adhering to, the two-months-only provision, would avoid most damage by the low interest rates to our long-term treasury responsibilities.

  • Our institutions would move at least some to take advantage of the extraordinary rates - and eye each other's doing so, which will signal an uptick again in economic activity.

  • Those institutions which used the advantageously borrowed capital to advantage, would begin to edge ahead, which would also signal an uptick in economic activity.

  • Bailout funds, people will happily accept forever and oink for more. Capital borrowed on the market, even at advantageous low rates, may show up much the same on the books but has a different psychology to it. With the clock ticking, institutions holding such capital will begin looking for uses to put it to.

  • The scheme is over in two months, and if it doesn't work we're in no deeper, unlike with the bailouts, nor have we spent massive amounts of taxpayer dollars like we have with the bailouts. If it does work, we'll have credit flowing again by the end of that two months and those enterprises throughout our economy which are sound, will have a reasonable chance of making it through this cascading recession.
Special local application - if the officials responsible can't or won't repair the national economy, perhaps YOUR local bank, bank plus associations, or local consortium of interests, CAN sustain and reboot the economy of your local community. Identify classes of loans whose effect is on local sales, local services and local employment, and give cases in these classes a special advance priority and 1-2 point advantage, again on a "firesale" basis but transactable over a 4 to 6 month period. The requirement of localism is so the lending institutions and interests don't see the benefits of their special program dissipated all over the landscape with no return benefits to the lenders and the community. Whatever is done at the national level, this looks to be something that can be done usefully at the community and "grassroots" level.

The method which gave rise to this idea: the fresh-in-the-morning method which I've practiced for so many years, see Simply Waking Up With the Answer


O

Your job, Gentle Reader:

  1. find everything that's wrong in this proposal, by whatever method, and advise me accordingly, by email to Win Wenger, AND/OR

  2. using one or another specific method for ingenious problem-solving, out of the hundreds now so readily available, devise improvements to this proposal or create new and better proposals of your own, drawing more on your actual ongoing perceptions and less on what you already "know" about the problem situation. AND/OR

  3. please be ready to respond to each others' inputs on this (if enough of you respond for me to put you in touch with one-another) - but in terms of current actual perception featuring use of one or more specified problem-solving methods, instead of sitting back on our comfortable unchanging opinions throwing those back and forth as in conventional discussions. Try to make each new input derive from a fresh-to-you perception.

  4. Feel free to start your own proposal on other major problem areas as well, following much the same intent and suggested "rules." I hope to give support and discussion to your well-considered proposal.
Let's not continue to be like that proverbial deer caught in the headlights, paralyzed and staring blankly at the onrushing economic disaster. Let us get in some useful discussion which might actually bring us into a better place.

Also to help get you thinking of other possible solutions, here is Part II following next below, a second of many possible partial solutions to our economic crisis and solving more than just the economic side of things. Review this also, and see what you think....

O


Part II - Can we have Standards without Regulations?

Here is one more partial solution to the economic situation. Indeed, it applies to regulatory situations across the board, not only to Wall Street, see what you think.

Regulate not by fiats which have to have the agency inspecting, policing, bringing suits and charges, levying fines, defending and filing court appeals, etc. etc....

...but by tax breaks and other incentives which those being "regulated" really want and will work to qualify for. This is PROFOUNDLY less costly. We need to set standards, but we don't want to do ourselves further harm by another general swing of the social and political pendulum between too little regulation and too much. It is much less costly to set a standard by simply setting and defining a condition which private firms desire and will seek to attain - when the burden of proof is on the individual or firm being "regulated," as it seeks to demonstrate that it has met that standard - than to pass a rule and try to police it into compliance.

It also preserves a greater degree of individual freedom and scope for initiative.

Statements which I think most reasonable observers can agree on, whatever their political party:

  1. The unregulated situations in Wall Street, in food and consumer protection, and other key areas of American life have led to unacceptable and incredibly expensive abuses. Those situations cannot be continued in their present form.

  2. Regulations in the previous error were overdone, burdensome, hugely expensive, also easily corrupted. Going back to such a heavily regulated era is not acceptable either.
Those two statements are not mutually exclusive, they merely define why we need to go by a different path this time. Make this the path of incentives of one sort or another, each firm mustering its own case and mustering evidence to prove that it has qualified to receive the benefit of the incentive. This is a lot cheaper all the way around than is either of the alternatives.

This was discussed in further detail in my older book on incentives, now freely online in On Incentives as a Preferred Instrument of Corporate and Public Policy, with further general considerations in the article, Mixed Economy.

If either of these propositions makes any sense to you, please bring it closer to public consideration and discussion by at least one more person. Thank you.

O

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Win Wenger


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