A Few Hairs of the Dog What Bit You

It’s a smug column — and given our circumstance, why shouldn’t it be? — in which Martin Hutchinson explains what Germany got right and what America got wrong. Oh, and what everybody else got wrong, too, including Greece:

Greece must be expelled from the euro and allowed to find its own level with a new drachma. Interest rates must immediately be brought up to well above the level of inflation while rigorous programs of public spending cuts must be combined with the closure of tax loopholes to restore integrity in public finances. Slush funds for housing and green energy must be wound down immediately. The Volcker Rule must be rigorously enforced on the largest global banks, so that trading is pushed off into systemically insignificant hedge funds where it belongs.

Something like this almost certainly will happen — if by default rather than by design. And, yes, the pun was intended.

On the US’s woes, Hutchinson is a bit too smug. He discounts the importance to the global economy of American entrepreneurship and risk-taking. Germany manages steady growth with its consensus-driven management, where government, business and labor are all glommed together. What the Germans don’t do very well, grading on a curve, is innovate. But surely we’ve enjoyed a little too much innovation on the financial side. What Apple does in the field of consumer electronics, maybe Bear-Stearns shouldn’t have been doing with our rent money.

So we know how Greece gets out — badly. How can we do better?

The way I see it, Americans need to deleverage more quickly than we’ve been able to with high unemployment and shrinking wages. We need the financial sector to get back in the business of lending — and lending sanely. 14 million Americans need to get back to work. And Democrats and Republicans alike are going to get pissed off.

Here’s my proposal — and it’s a package deal. You can’t really separate any of it out.

• Repeal ObamaCare. Job creation fell of a cliff immediately after ObamaCare became law. It is a jobs-killing program. Reform of Medicare/Medicaid and employer-based insurance must still come, but it can wait for a strong recovery.

• Repeal Dodd-Frank. What ObamaCare does to jobs, Dodd-Frank does to lending.

• Reinstate Glass-Steagall. Sorry, my Republican, Libertarian, and DLC friends — but letting deposit-taking banks get into high-risk investing was just plain stupid. This might not be an ideal solution, but it will reduce systemic risk to the banking system.

• Dissolve Fannie, Freddie, and get the government out of the mortgage business. Twisting banks’ arms to get them to finance bad loans got us into our housing mess. The Gramm–Leach–Bliley Act of 1999, which effectively repealed Glass-Steagall, is what allowed the housing mess to infect the entire economy and send us spiraling into the Great Recession.

• Mortgage relief and restructuring. It’s probably impossible for the housing market to find a bottom — and then start growing again — while a quarter of all mortgages are underwater. Restructure the adjustable-rate mortgages (ARMs) to fixed-rate instruments, and lop off a fixed percentage of the value of all underwater, low-or-no-money down, ARMs. Recapitalize the stupid banks if needed. Let the Big Brains figure out the details on those last two items. I’m sure they’ll get them wrong, but this is a rare case of something being better than nothing.

What we’re suffering from now is the worst of three worlds. We have a government-created financial crisis and recession. We have government making both situations worse. And we have a private sector too hobbled and too scared to grow our way back out.

So — and it pains my free-market self to say this — it’s going to take government to start undoing some of the damage. But, predicating the last item on dissolving Fannie & Freddie ought to go a long way to insuring that this never happens again, and restoring some sense to our banking system.

I know, I know, it sound a lot like “let me have just one more hit and I swear it’ll be the last time.” But I’m not sure there’s a better solution. If I’ve missed anything, please tell me.