How to Fix the Economy in 90 days or less.

[ 0 ] July 8, 2010 |

Warren Mosler’s 11 steps to fixing the economy

1. A full ‘payroll tax holiday’ where the US Treasury makes all FICA payments for us (15.3%). This will restore ‘spending power’ and, by allowing households to make their mortgage payments, will fix banks from the bottom up. It may also keep prices down as competitive pressures may lead businesses cut prices, passing on their tax savings to consumers even as sales increase.

2. A $500 per capita federal distribution to all the states to sustain employment in essential services, service debt, and reduce the need for state tax hikes. This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP are restored.

3. A federally-funded $8/hr job and healthcare benefits for anyone willing and able to work. The economy will improve rapidly with my first two proposals and the private sector far more readily hires folks that are employed. In 2001 Argentina implemented this proposal, putting to work 2 million people who had never held a ‘real’ job. Within 2 years 750,000 were employed by the private sector.

4. Making banks utilities. The following are disruptive, serve no public purpose and should be done away with:
a. Secondary market transactions
b. Proprietary trading
c. Lending against financial assets
d. Business activities beyond approved lending and bank account services.
e. Contracting in LIBOR. Fed funds should be used.
f. Subsidiaries of any kind.
g. Offshore lending.
h. Contracting in credit default insurance.

5. Federal Reserve — The liability side of banking is the wrong place to impose market discipline.
The Fed should lend in the fed funds market to all member banks to ensure permanent liquidity. Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.

6. The Treasury should issue nothing longer than 3 month bills. Longer term securities serve to keep long term rates higher than otherwise.

7. FDIC
a. Remove the $250,000 cap on deposit insurance. Liquidity is no longer an issue when fed funds are available from the Fed.

b. Don’t tax good banks for losses by bad banks. This serves only to raise interest rates.
8. The Treasury should directly fund the housing agencies to eliminate hedging needs while directly targeting mortgage rates at desired levels.

9. Homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.

10. Remove ‘self imposed constraints’ that are disruptive to operations and serve no public purpose.
a. Dump the debt ceiling – Congress already votes on spending and taxes.
b. Allow Treasury ‘overdrafts’ at the Fed rather than forcing it to sell notes and bonds. This is left over from the gold standard days and is currently inapplicable.

11. Federal taxes function to regulate aggregate demand, not to raise revenue per se, and therefore should be increased only to cool down an overheating economy, and not to ‘pay for’ anything.

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Category: Economics, Markets and Trading, Politics