Our government's response to the crisis has involved one market intervention after another. One day we are "providing liquidity", the next day we're "buying troubled assets", and the next day we're "injecting equity into financial institutions".
With all the new acronyms created over the past several months ("TAF", "TSLF", "TARP", "EESA", etc.), our financial Scrabble board has run out of letters..
As we intervene in the market, endogeneity in asset pricing--the vital cog that keeps our pricing mechanism alive and the bulwark that holds up our free market economy--is destroyed. We resort then to being a few guys in a small room with a naked bulb, cigars, etc., determining prices.
It is no wonder that investors are choosing to sit on the sidelines rather than try to out-guess the next move of the Government's 'Plunge Protection Team'.
The market has now voted on the current plan - twice. The first time, from the 1:30pm passage on October 3, the market plunged for the worst week since the Great Depression. The votes are in for the most recent version:
We need to go in a new, bold direction. One that does not attempt to manipulate the market (a futile endeavor in any event, which should be clear by now). One that ignites, rather than interferes with, the free market's engine of growth.
Here is our plan:
1) Stop the presses
Literally. No more liquidity to be created. No more bailouts. The current plan, to buy bank shares is doomed to failure. In macroeconomic history, there has never -- NEVER -- been a time when institutional intervention to shore-up prices / wages / exchange rates has managed to defeat the endogenous power of the market. NO MORE GOOD MONEY AFTER BAD.
2) Jump-start the economy by rebuilding American infrastructure to again be the best in the world
Spend on bridges, airports, trains, education, power-grids, broadband access, etc.
Consumers used a high proportion of the recent "stimulus checks" to pay down debt.
Likewise, banks are likely to use a high proportion of the recent capital injections to fill the massive holes made by the toxic Level 3 Assets on their balance sheets.
Attempting to "flow" money through either consumers or lenders, in the current environment, is doomed to fail. In rare situations, where confidence is totally lacking, direct Government spending is the best and fastest way to achieve a jump-start.
A massive program of infrastructure spending and investment, with the goal of re-establishing American infrastructure as the best in the world, is urgently needed today.
3) Enlist prominent, respected Americans to voluntarily market these REBUILDING AMERICA BONDS to the American public.
The faces of this effort should be Americans who have earned the universal respect of their countrymen. If willing, these would include luminaries such as Warren Buffet, Tiger Woods, Paul Volcker, Bill Cosby, Rudy Giuliani, Clint Eastwood, Oprah Winfrey, Bill Gates, and others of similar stature. No-one in the current leadership has any credibility, and as such should not be seen as the "face" of this project.
4) Borrow the funds from Mom & Pop America
From the time of our country's Founding, Main Street America has never refused the call to service. After 9/11, in a moment when Americans were eager to serve in a common purpose, our Government asked them simply to shop. Certainly consumer spending was helpful, but many have argued that this was a missed opportunity.
We must seize on the can-do spirit and natural patriotism of the American people and invite them join in rebuilding America.
Speaking with many "Main Street" Americans, a clear theme as emerged: Angry as they are with the situation, and disgusted as they are with current leaders, Americans want to help the economy get back on track! Rather than go back to the well with foreign lenders, market this issuance first and foremost to Americans.
And, importantly: Not one penny more would be spent than is voluntarily subscribed by purchasers of the REBUILDING AMERICA BONDS.
5) The REBUILDING AMERICA BONDS would pay a coupon which is indexed to inflation (much as "TIPS"). The bonds would pay a regular coupon, and the interest rate paid would be adjusted every six months. In this way investors can't lose from the effects of inflation.
6) Total Transparency, unlike any Government program before, would be a central component
a) We tell lenders exactly where the money will go on a state-by-state basis -- for example, residents of New Jersey will be told which specific airports, school districts, power grids, and university programs are being funded.
b) Websites will show where the money is being spent and the services provided and the amounts transacted, for any bondholder to see.
7) We must not subsidize alternate energy research.
Let the venture capital--the smart money--bring the new ideas to fruition. Once this happens, we must then nurture the infant alternate power industry to maturity by giving real tax breaks. This approach will ensure that the innovating companies are not forced to spend scarce resources hiring expensive lobbyists to compete for a fat share of federal subsidies, but instead, will be able to direct their resources to hiring real research scientists. The same applies to biotech, nanotech, or any number of other promising new industries.
Government spending is a blunt instrument - successful development in emerging technologies requires much more deftness and finesse than can be applied through any government-run program.
8) Tax cuts for all--for the next year at least.
One of the biggest mistakes that led to the Great Depression was a savage increase in taxes. This is no time to repeat that mistake. This applies equally to taxes on capital and income - as both investors, and consumers, are needed once the REBUILDING AMERICA program gets the economy moving.
9) Capital will flow back to the American economy.
Once foreigners see that we are reinventing America again, the global money will flow back in. No-one will want to be left out on the sidelines as America becomes the hottest emerging economy on the planet.
America is at her best under adversity. She has shown this time and time again. Our friends love this quality about her; our enemies have repeatedly discovered this quality at great cost. It is time to show the world what we can do.
-Farrokh Langdana, Ph.D.
Rutgers University Business School