Well, I opened my big mouth

I opened my big mouth and whined about the stupid "bailout' in my post "Congressional IQ". So Jim Gatos called by bluff and asked what should be done about it. Well, in order to have the right to whine, one must also have some suggestions to fix the thing he is whining about, so here is my reply to what Jim asked. You can read Jim's comment here: Jim's comment and here is my reply:

Hey Jim,

For more on what is causing this financial meltdown watch this video: Money as Debt

You asked, "first is what should be done, and secondly is what can the country do to make sure this mess doesn't happen again."

Interestingly there was a law that could have prevented this sort of thing from happening. It was called the Glass-Steagall Act and it prohibited investment banks from acting as commercial banks. Investment banks (which make speculative bets) could not own commercial banks (which accept savings deposits from customers) and so depositor's savings would not be put into risky investments.

The Glass-Steagall Act was made law shortly after the Great Depression and was meant to help stop another such depression. The Act was repealed in 1999 after the banking industry poured $200 million into lobbying efforts to get rid of it. See this article for much more data: The Con In Central Bankers' Confidence. A fascinating (though scary) article which explains a lot about how we got into this mess.

Your questions are tough to answer. Here is what I'd do if I were in a position of power: I would apply the "Danger Formula" - a part of Scientology Ethics. Here are the steps of the formula (in quotes) and what I would do. My suggestions are based on the little data that I have on this mess. I'm sure people who know more about it could come up with better ideas.

Also the actions I suggest to take are my suggestions only and have nothing to do with my Church. The Church of Scientology does not get involved in politics or government.

"1. Bypass (ignore the junior or juniors normally in charge of the activity and handle it personally)"
I would bypass the financial institutions which brought this about. The next step of the formula gives what I'd then do.

"2. Handle the situation and any danger in it."
There are a couple of ways this could be done.

a) To handle the "credit crunch": the government could set up its own agency to give loans to businesses and individuals. They already have the SBA in place so its role could be expanded.

The rules for qualifying for a loan could be set to the same rules as the average bank followed before the craziness hit.

Once this agency starts giving out loans, following reasonable qualification requirements, it is likely that banks would start to follow suit and lend out on similar terms. Otherwise they'll go broke because no one will be getting loans from them.

Also the government could mandate the rules banks must follow to decide who can get a loan. This will bypass the psychotic pendulum swing that went from "Yes I will give your pet duck a loan" to "You need a credit score of 25,000 to qualify for a $10 loan".

The end product of these handlings is that loans will start to flow again but following sane loan qualification guidelines.

b) To handle the problem of homeowners not being able to pay their mortgages: one handling would be to allow them to change their mortgages from 30 year to 40, 50 or 60 year mortgages. This would reduce their monthly payment and allow them to stay in their home and allow banks to keep the house on their books as an asset.

I'm sure the bright boys and girls in the banking industry can think of other solutions. So people who made dumb mortgage choices (with the help of unethical banks) can keep a roof over their heads.

c) To handle the problem of banks with worthless "assets" on their books. With steps a) and b) underway the housing market should be starting to recover. So the value of houses will be better. The banks should fix up foreclosed houses so they can be sold - perhaps at a loss but at least at a price in a recovering market. They could also offer longer-term mortgages so more people can afford to buy with less chance of being unable to pay three or four years down the road.

"3. Assign the area where it had to be handled a Danger condition."
Tell the financial sector that they are in trouble and better get their act together otherwise they'll be out of a job and in even bigger trouble.

"4. Assign each individual connected with the Danger condition a Personal Danger condition and enforce that they follow the formula completely, and if they do not do so, do a full Ethics investigation and take all actions indicated."
(The steps of the Personal Danger Formula are similar to the steps here. If you want to know more then buy the book Introduction to Scientology Ethics)

First, every individual in the sectors of the financial industry where this happened have to write up, in exact detail, the crimes and other unethical actions they did or were involved with. If they do an honest job of this then the penalties will be lessened. If they don't and their activities and crimes are found out later then the penalties will be increased. Then they do the steps of the Personal Danger Formula.

I'd also have further investigations carried out based on what came up in these write-ups. All crimes found would be made public and prosecuted.

I would also have a major investigation convened into the revoking of the Glass-Steagall Act. Every politician who voted for its revocation, every lobbyists who lobbied to have it revoked and those who funded them would be looked into. Everything found would be made public and all crimes prosecuted.

"5. Reorganize the activity so that the situation does not repeat."
I would disband the Federal Reserve and put the country back onto the Gold Standard, initially. On a longer term I would find another standard to use that reflects the productivity of the country rather than how much gold we have in reserve. For example, use the GNP as the basis for how much money we can allow in circulation. We produce a billion dollars worth of product then we can issue that many dollars.

I would make the issuance of money follow the Constitution.

I would abolish income tax and replace it with a national sales tax. This would encourage people to save and would only tax them when they spend.

I would figure out a way to phase out the fractional reserve system of banking and get to a much more rational system that doesn't cause inflation and the sort of crash we are experiencing.

"6. Recommend any firm policy that will hereafter detect and/or prevent the condition from recurring."

Reinstate the Glass-Steagall Act.

Add learning about money to school curricula: its history, how it is manipulated, how the fractional reserve system was used by bankers to amass huge personal fortunes and power, how the Federal Reserve system brought about the current mess, basics on how to stay solvent, how to balance your check book, etc., etc. That way future generations won't get fooled again.

There are probably lots of other things that can be done, but this is not my field, so I'll leave it up to people who know more about it.

So, Jim, that's my suggestion.