"This Nation Asks for Action, and Action Now."
By William Neil
September 20, 2008 - 3:25pm ET
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Author's Note: (Sat. Sept. 20th)
The following post was sent out to a large Email audience around 10:30 pm on Thursday evening, September 18, 2008. Its first policy point was to call for an immediate ban on shorting, thereby beating actual events by about 7 hours, as CNBC was reading the just -arrived announcement from the Securities and Exchange Commission listing 799 stocks/firms which could not be "shorted" around 7:00 am on Friday morning. The list has grown since then and some key market "nodes" have re-gained the right to "short" in a constructive way to carry out complex trades. Please also note the call for a "Transaction Tax" on Wall Street and other domestic exchanges, first proposed by Robert Kuttner in his book "Obama's Challenge." I call it a "Speculation Tax," although its base could be much broader than just speculative activities. It's a light tax, well under 1% (harkening back to the Tobin international trading fee) and it is projected to raise around $100 billion dollars a year. Since a central dynamic of the debate about to ensue the week of Sept. 22 in Congress will center around the enormous scope of the proposed "RTC" type "bail-out" of Wall Street - $800 billion - or more - the level of debt it incurs and how to pay it off will be around for a long, long, time. Whether or not the issue gets raised this week - Progressives need to be thinking of logical revenue sources to meet the cost of what Wall Street and the de-regulators have wrought - and it is eminently fair to expect those who play the market for short run excursions to help pay for rescuing the system they have helped place in such jeopardy.
I also make a full bodied call to convert the now infamous private "rating" agencies to public ones, perhaps with the help of American business schools. There's more, but those are the highlights.
September 18, 2008
Dear Citizens and Elected Officials:
Due to the unprecedented nature and speed of the unfolding financial crisis, I’m shifting formats a bit. “The End of an Era” is happening faster than anyone could have imagined. What follows is brief and contains some policy recommendations. Some are for the immediate front burner, some for mid-term, and some for long-range changes. They are not meant to be comprehensive, but rather address the great urgency of the moment, and to get citizens involved in the needed policy discussions, which are going to rise in prominence over the next several days and weeks.
I trust that the front pages, whether in print or on-line, have convinced skeptics that we are truly on the verge of a 1929-1933 type crisis. The level of wealth destroyed this week, and the dramatic freezing of the world’s credit markets means that whatever level of recession was coming, it will now be more severe than previously thought. The idea that even money-market funds can unravel is shaking Main Street. The piecemeal approach to saving failing financial institutions one by one is not adequate. The systemic reforms that everyone wanted to delay until a new administration can’t all wait. Some will have to because long-term reforms for ten years down- the road can’t be designed in 10 days. But some immediate and mid-term ones will have to be done on that short timetable. So here’s my best judgement from what I hear and read and have come up with on my own. I’m on the record as predicting frozen markets since February of 2007. And frozen they now are. Further reading will be held to the end, but I’ll try to credit ideas to those who have put them out and do so right in the text.
FDR said it on March 4, 1933, and we are back at that moment 75 years later: “This Nation asks for action, and action now.”
1. The SEC and Federal Reserve need to ban short selling of all types immediately. This goes way beyond the half-way measures just proposed. Robert Kuttner raised this idea in his new book, Obama’s Challenge, and the New Deal pushed for it in its 1934-SEC proposals, but they didn’t make it. The idea behind it is self preservation now for our financial system. Even with the ban on “naked-shorting,” regular shorting still utilizes a form of leverage that allows hedge funds and other major actors to multiply their downward spiral bets against each newly vulnerable financial institution to a degree that threatens the entire system. It may have to be implemented in other world exchanges as well. On Thursday afternoon (Sept. 18th) CNBC announced that just such a ban has been put in place on London markets. Some of this shorting tactic is pure desperation by hedge funds forced to raise large sums to meet demands on them from banks – some is just the old “animal spirits” of free-market orthodoxy, oblivious to how interconnected the new financial world really is. The financial world will not end if it looses the shorting mechanism. If you own stocks, bonds or indexes and don’t like the way they’re run or their future prospects, then sell – all or part. Whether this is a 3-6 month ban or perhaps longer, it needs to stay on for as long as the system remains so fragile. Congress needs to step into this vacuum and you can help by asking your Senators and Reps to call upon the Federal Reserve, the SEC and the major exchanges to put a full ban in place. I believe this can really make a difference in easing the short run pressures.
2. The problem in the banking system and credit markets is not just one of liquidity, but also one of solvency. We need a “Transaction Tax,” or “Speculation Tax” to raise revenue. Capital is not adequate because of the mountain of bad assets, like the bad mortgage debts, and the fact that their values keep dropping, and promise to continue to do so as the income streams backing them falter with the downward spiral of general economic activity. Thus we will have a continuing “capital is not adequate” crisis that moves in tandem with the declining debt instruments that the giant speculative pyramid has been build upon. Months ago I mentioned to you that the idea was being floated in the private sector to create a giant “bad bank” or “conduit” to take all the questionable mortgage debt off the holders’ balance sheets. It sounded a bit whacky at the time, but the crisis has evolved to lead me to believe that it can’t be resolved by individual institutions trying to work out their bad bets and shrinking capital one at a time. More and more you are going to hear the call for a Resolution Trust Corporation (1989-1995) type entity to take a lot, if not all, of these toxic instruments off the hands of those with them now so that the remaining financial system can get back on its feet and resume something resembling normal lending. Jim Cramer says the cost could be as “low” as $400-500 billion and is pushing the idea. I tend to think in terms of $1-2 Trillion, the price tag being put on the overall losses by folks like Nouriel Roubini. The Dow jumped 400 plus points on the mere thought of systematic help. As I write on Thursday evening, September 18th, high level meetings are under way in Congress to discuss the general idea. We are facing a huge decision crossroads here. There are only two sources for sums that large: our own “sovereign” nation or private equity/ Sovereign Wealth Funds. That means US taxpayers; or the unregulated private equity funds or the foreign nations behind the Sovereign Wealth Funds, a list of which I don’t believe will prove to be satisfactory to the American people. And Private Equity (and Hedge Funds) are going to lose some of their current freedom of maneuver with new regulations reducing the allowable leverage and forcing full public disclosure like other entities, so they may not be around for the time it will take to buy and re-sell all these damaged investment instruments (2-10 years?)
So here’s the idea. If you look at the current Federal Reserve’s balance sheet, it can’t keep up levels of this type of intervention running for long. And many say the Fed shouldn’t be the institution running the bailouts at all. We hope the Treasury can raise what they need this week and next week: now running to $100 billion or more from the sale of short term US instruments. The larger sums to make a RTC go could be raised in chunks of $100 billion. There are huge practical problems to doing this, and many details to be considered. There is a large range of mortgage debt out there – what types should be purchased? Should it be done from solvent institutions or ones which have collapsed? Whose books will the newly purchased debt reside on? What if the economy continues south and other types of derivatives go bad? What level of derivative will be taken – and are Credit Default Swaps part of it? Other troubled industries are said to be lining up in the halls of congress as you read this.
Whether we move down a RTC type path or a RFC one (from the New Deal) which helped railroads out in the 1930’s (see Steve Fraser’s article below, and which Sen. Schumer and Senator Obama are alleged to be conferring on) or some other new design, I support what Robert Kuttner has broached in his book, a transaction tax on market activity which, at a rate of well under 1% is capable of raising $100 billion per year. Given the scope of this task, it may have to be a bit heavier than he intends, but still under 1%. The idea is to make those whose rapid and repeated actions in the financial markets are causing so much stress to help pay for relieving it – a levy that leans against short run speculation but that is not heavy enough by itself to end it. I would call it a “speculation tax” even though it would also be paid by folks like you and me entering or leaving markets in a more main street fashion. For hard-line conservatives born and raised on anti-tax ideology, who are already foaming at the mouth at the mere thought of this, I’d remind them that what’s left of the US financial system could re-capitalize itself through more traditional means: charging $5 per check and $10 per ATM withdrawal….and higher fees for late credit card payments….and so on…the usual. Or we can have China, Japan, Russia, and Saudi Arabia step in and buy up what’s left of Wall Street with the vast store of dollars they’ve been accumulating while we ran up debt. I prefer to tax speculators and also pay a small price myself to move money around in investment markets.
3. Credit Agencies Should Be Made Public Agencies. A possible RTC like approach would be an enormous commitment of US taxpayers to keeping our financial system from collapsing. It will have to make up ground by correcting for the disastrous effects of nearly 30 years of de-regulation and monitoring by entities and officials who didn’t believe in even the weakened roles they were supposed to be carrying out. So there has to be a further price to pay for the public bailout, whatever the design and details: a new and redesigned system with vastly reduced speculation. The balance of power, which had swung so far to the private sector that it has brought us and the world to the brink of another 1929, now will have to swing back towards a sober and diligent public sector role. Bob Kuttner only hinted at it in his “reform” article of Sept. 17, but I’m putting a more full-throated version out: we need public agencies performing the functions of the various credit rating agencies that have been so deeply involved at nearly every step in this financial fiasco. Exactly what form of public agency will be the subject of much debate, and perhaps our educational institutions can play a role here – after all, the nation has been flooded, ever since the “Morning in America” days, with tens of thousands of MBA’s, and with the dramatic consolidations which are happening and going to continue on Wall Street, there will be tens of thousands of the newly laid off: very credentialed, very skilled people who can help with these new agencies. But the public will have to be as sharp as hawks to make sure that conflicts of interest are banned and that the new employees put the long term public good above all other considerations.
4. The degree of leverage for various financial institutions is going to have to be explicitly set, probably from 10:1 to 5:1 depending on the setting. As my readers by now probably know, we have gotten into deep trouble with leveraging ratios ranging from 100:1 to 30:1. Whether capital requirements can be set so boldly just now, under the crisis of inadequate capitalization, I am going to leave to others and keep an open mind. Wherever margin requirements need to be raised to help fill in the gaps in policy and to reduce the degree of risk in financial markets, then that has to be made clear with public debate and easily understood application.
5. Hedge Funds and Private Equity Funds must be brought under the new broad umbrella regulations based on functions actually performed in the markets, regardless of the labels under which they are carried out. This means full and equal disclosure. If this means they cannot survive the calls for transparency (remember our author Richard Bookstaber doesn’t think hedge funds can fully disclose and survive) then they don’t have a place in the newly governed markets.
As this posting goes “to press” late Thursday evening, I do have worries about the rush and complexity of what Congress is going to consider over the next week or so. There is tremendous pressure to act quickly, because of panic in the markets, and the high political stakes. I do worry that things are moving so fast that the public’s voice and taxpayer protections will be slighted in the rush. So I hope that what is enacted contains provisions to allow for flexibility and future adjustments. And ongoing citizen participation.
If my readers think these are important matters, I urge them to call Senators Schumer and Dodd, Cardin and Mikulski and Representatives Barney Frank, Charles Rangel, Majority Leader Steny Hoyer and Chris Van Hollen. They can be reached through the US Capitol Switchboard at 202-224-3121.
Further Reading and Sources:
Robert Kuttner: “Seven Deadly Sins of Deregulation – and Three Necessary Reforms,” The American Prospect, Sept. 17, 2008 at
Nathan Gardels Interview with Joseph Stiglitz: “The Fall of Wall Street is to Market Fundamentalism What the Fall of the Berlin Wall Was to Communism,” The Huffington Post, Sept. 16, 2008 at
Steve Fraser: “Wall Street and Washington, How the Rules of the Game Have Changed,” TomGram, Sept. 18, 2008 at
William Greider: “The Scent of Fear,” The Nation, Sept. 17, 2008, at
The very best to my readers,
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Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future