How To Fix The Economy

The U.S. Economy is in a bad state. What can be done? I will offer an agenda:

(1) Reconsider our participation in the Basel accords and recognize that purely commercial banks have a different set of risks that the now hybridized investment/commercial banks. These regulations penalize purely commercial banks by demanding higher capitalization while insanely suggesting that derivative trading is no more risky. The people framing Basel III are considering something like this. As I wrote recently the “one size fits all” notions of Basel are counterintuitive. I see no reason why every country needs the same rules. The biggest problem I have with Basel is that it assumes that risk is static.

(2) Enact Simpson-Bowles. Absent a comprehensive solution for fiscal sustainability, nothing else matters.

(3) Encourage privatization of infrastructure spending.

(4) Eliminate some government regulations which discourages infrastructure building and job creation. The notion that Keynesian deficit spending can jump start the economy may have been rendered useless by excessive regulation regarding environmental protection and zoning

(5) Give a new agency control over the deficit

(6) Recognize that politics is the problem not the solution.

(7) Eliminate government agencies which are no longer needed or have failed.

(8) Discourage the government from creating asset bubbles (see next paragraph.)

Each of those is a short phrase but a massive change in the way of doing things. What we must recognize is that the problem is not an economic one but a political one.

Simpson-Bowles is the best example. Presented with a comprehensive solution to our fiscal ills, the President and most of Congress have ignored it because it is not compatible with reelection.

Another example is Dodd-Frank. Congress gave no recognition to the fact that the subprime mortgage mess was set into motion by the government with the 1994 National Homeownership Strategy.

Politicians have placed the blame on banks (let me be clear that banks certainly played a gigantic role in this) and passed Dodd-Frank which creates more banking regulation.

It will be years before the effects of Dodd-Frank on the banking system and the economy in general are felt.