Economic Policy: What Should We Have Done In 2009?

Government spending does not stimulate the economy because government is far less efficient than private enterprise. Tax rate cuts would stimulate the economy because they would reward productive investment with a better rate of return and ultimately put more resources in private hands. The crash of 2007-2008 was due to over leveraging. To unwind it, a lot of debt needed to be converted into equity. A couple of changes would encourage that. First would be to lower the capital gains tax rate to encourage more equity investment. Another thing that would be to make dividends tax deductible to corporations, just as interest payments are. This would remove the bias in favor of debt financing for private firms. The way to prevent too big to fail banks is to force them to have bigger capital reserves than small enough to fail banks. Dodd-Frank could be replaced by a simple rule that says that if the bank is larger than 1% or 2% of the overall banking assets of the United States it needs to have a 10% capital reserve. To make this a little easier, the law could allow banks to sell a special class of bonds that are convertible to equity in the event of regular capital reserves falling to zero. Regular capital reserves for big banks could be 5%, with the additional 5% coming from the convertible bonds. None of the banks that failed or were bailed out would have needed federal help if their capital reserves were this high. Big banks will dismantle themselves quickly to get away from high reserve requirements and the problem will be solved. Republicans should remember who Wall Street backs with political contributions and do the right thing on requiring big reserves from big banks.

http://www.nationalreview.com/article/395775/debating-economics-james-c-capretta

Prevent Mega Bank Bailouts

I had a really strong reaction to an article about mega banks that are too big to fail.  The only way to make sure there are no more mega bank bailouts is to make sure that mega banks are sufficiently capitalized that they can absorb massive losses and that their management has mega incentives to be careful.  The 12 mega banks ought to have 8 to 10 percent of assets in equity capital or convertible bonds that can be turned into equity when needed to absorb losses.   If stock and convertible bond holders are on the hook for a really big chunk of losses, they will force management to be much more careful.  Also, mega bank management compensation above that of the president of the United States and all of the outside directors' compensation should be reclaimable back 3-5 years in the event that a bailout is needed for any mega bank that's too big to fail.  Requirements like this will reduce the number of mega banks, or at least make sure their managements and stock and convertible bond holders have a LOT of skin in the game.  Bottom line is make moral hazard a lot more painful for all involved.

Original Article on the Mega Banks:

http://www.commentarymagazine.com/2013/04/30/too-many-too-big-to-fail-banks/