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Austrian Bailout Package Revised


Austrian Bailout Package—Part A Revised

The idea of my initial proposal was to "throw something onto the table" and see what the reaction would be. This revision throws out a couple of items, revises others, and tries to provide a brief explanation for the eight points of the plan. I would like to thank everyone for all their comments and suggestions, especially Jeff Scott. Keep your comments and supporting links coming!

The goal of this "bailout package" is not to prevent the corrective process in the economy from taking place, but rather to allow it to take place in an environment that encourages the revival of the economy. The government's bailout package only makes our situation worse by trying to forestall the process and by making it more difficult to revive the economy.

  1. Do not increase FDIC coverage. Set rates according to the risk of the bank's portfolio and to encourage the use of private alternatives such as cross guarantees or 100% reserves on demand deposits. Increasing coverage only puts the taxpayer at greater risk and enhances the moral hazard problem. Private alternatives and risk-based premiums reduce the risks to taxpayers and will help stabilize banks. For example, banks could be certified as 100% reserve banks (on demand deposits) and compete in terms of safety in other ways
  2. Make interest earned tax free on time deposits and non-governmental, non-agency, and non-authority bonds (not demand deposits and MMMF). The real problem in the economy is too much debt and not enough savings. Making interest earnings tax free will encourage saving and stabilize the banks' deposit base. This will also put the private sector on a level playing field with government borrowers and encourage people to save and to increase their wealth.
  3. Convert Fannie Mae and Freddie Mac's status from conservatorship into receivership. These institutions should never have existed in the first place. They are "public private partnerships" which are the most dangerous institutions for a free society. Their assets could be auctioned off in stages which would allow for a market to develop.
  4. Convert AIG's status from government ownership to receivership. Allow AIG to restructure via bankruptcy so that the viable parts of the company can continue operations. This is how the market works.
  5. Cancel the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) at the end of the announced program (January 30, 2009). This is a special privilege that must come to an end so that the necessary restructuring and liquidation can take place. Continued funding only discourages this correction process. We must remember that much of the "financial industry" only exists because of the profit potential created by an inflationary Federal Reserve and that these resources could be put to positive uses elsewhere in the economy.
  6. Announce that the Federal Funds rate will be allowed to "float" at market rates starting, say, January 30, 2009. Banks would henceforth have to borrow at the penalty rate at the discount window or offer their depositors higher rates of return. Allowing the market to determine the interest rate will help prevent the Fed from inflating and causing bubbles in such things as real estate and tech stocks. There is no "right" to cheap credit. Providing cheap credit is what got us into this mess in the first place.
  7. Announce that the Federal budget will be prorated beginning with the fiscal year starting 10/1/08 including all defense spending and transfer payments. This means that the Federal government has to run a balanced budget and must either cut at their own discretion or see all division budgets cut by the same percent. This is how state governments operate. Balancing the budget will send a positive message to the market about the economy and the value of the dollar. Ending overseas military operations and freezing all other spending would probably balance the budget.
  8. Restore constitutional monetary status to gold and silver to act as alternative mediums of exchange. The dollar will continue on, but people will be able to save in terms of gold, make contracts in gold, and set prices in terms of gold without any capital gain tax considerations. It should be possible for debit cards to instantly redeem gold into dollars. This reinforces #6 and #7 above because people will increasingly use gold if the government tries to inflate or spend too much money.

Mark Thornton is a Senior Fellow at the Mises Institute and the book review editor of the Quarterly Journal of Austrian Economics. He has authored seven books and is a frequent guest on national radio shows.

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