A Minimalist Solution To Solve The Crisis

No one has asked, but here it is anyway: the Official Implode-o-Meter Financial Crisis Solution Proposal(tm). It is two lines. Are you ready?!

1. Temporarily (say, for five years) extend FDIC to all deposits. Eliminate the insurance fees (since it's not a real insurance program anyways). Capitalize directly from the Treasury as needed.
2. Jawbone banks into raising capital from the private markets, as many have already done extensively (such as Citigroup and UBS).

That's it! Item #1 is necessary to eliminate bank runs as a driver of institutional failure. If banks have short-term liquidity problems due to irrational bank-running activity, there are already ample Fed facilities to make up for the short term cash gap. If they need long-term capital, they need to get it from the market, paying whatever rate is necessary, and diluting existing ownership. This is the perfect punishment for acting recklessly. Much in profits has already been pocketed, anyway.

Also, eliminating the silly insurance fund fees will help banks with their cash crunch.

The second point is needed to send a definitive message to The Street that there will be no omnibus deus ex machina rescue, with the government swooping in and transmutating toxic assets to good. It is not fair that some companies have had to come clean and recapitalize, paying a steep price, while others have pretended their balance sheets are fine, but secretly banked on government support. That is what did in Wachovia and WaMu.

(The deposit insurance "amnesty period" idea is borrowed heavily from Mish and the Minyanville folks.)

This is not all that needs to be done to reform the whole system, but it will get us through the "crisis" period without totally shutting down or nationalizing lending.

Long term, the government must get out of the business of fixing interest rates, with a bias towards too-low interest rates. It also must move back towards sound money; at minimum, it must stop penalizing people for owning gold or silver or other commodities to protect their wealth.

Frequent contributor Reggie Middleton also has great comments in the vein of the above (except we don't think any direct support should be given to the banks at institution-level -- only at deposit-level):

Risk taking investors should be expected to take, and accept, risk. What the hell is so hard to understand about this? Credit and equity investors assumed x units of risk in a bid to attain y units of reward. Why should the government underwrite the risk the investors took? Any government investment should not be consumed until the previous investors have been wiped clean! The government is not the recipients of the rewards pursued by said investors, thus they should not be the recipients of the risks either.

Check out his service's performance as well -- he does top-notch work.

— Aaron Krowne, for The Implode-o-Meter.