The best solution is called “Value reset”. I mean we should reset the value both the assets and liabilities side of the banks to reflect fair value.

1) Value reset on assets side means that the value that banks hold such as mortgage value should reflect the fair value for lenders and borrowers. This looks like Obama trying to do to reduce foreclosure but doing this way is not going to use any taxpayers’ money but use the loss of banks but it does not add any loss for banks because banks already set aside the provision for the risk of this debt default. It help the process of capitalism go on but the way Obama is trying to do is not comprehensive and will create moral hazard that will cause more and more taxpayers’ money for the intervention. The way to reduce debts of mortgage borrowers will cause loss of banks; therefore, we have to do liabilities reset.

2) Value reset on liabilities side means the value of equity holders and bondholders must reflect losses from investment in the banks. Some banks have to write down all equities part and to transfer sub-ordinated debt or even some of unsecured debts into equities. This is not going to cause any taxpayers’ money and if governments would like to protect money of depositors; they can join debt and equity swap scheme with other bondholders. This is quite fair for taxpayers’ money and we just use Capitalism process suddenly and aggressively to solve the problem rather than delay this process and use Socialism by using taxpayers’ money to protect losses of private investors.

The role of government is to accelerate the value reset process to reflect all fair price and ensure the confidence of new investors that all price reflect the fundamentals not reflect the intervention pricing.

I think the way of US government intervention is like Japan did by protecting the wealth of investors by public money. The intervention will cause the lack of private interest on economic activity because no one can measure risk and return and no one can measure what is fundamental value of investment; therefore, private sectors decide not to invest or invest elsewhere like Japan, Russia. So, if there is too much wrong intervention like this, America will definitely live with long deflated economy like Japan.

My concern is who is going to bail the U.S. out as, like the banks and investment banks who bet their future and existence on mathematical models, and theories of asset price movements that proved wrong, we bet our economy on the theory of global warming using mathematical models and theories of the greenhouse impact of a gas that represents only 0.0383% of the atmosphere. (On a flight from NY to LA, 0.0383% of the distance is not even the length of the runway.) What can you do to protect against such insanity? Buy shares in the companies that will benefit from this global warming insane policy.

It is apparent that “too big to fail” financial firms are also detrimental to economies, and actions should be taken by the government to prevent their formation and to break up existing ones.

Clearly the “financial super market” model exemplefied by Citigroup does not work.

I also wonder if there is an economic advantage to having a bank which is national in scale in a country the size of the U.S.? Are not regional banks quite capable of providing the same services as national banks?

If anything, the financial crisis has led to even bigger firms than we had before as supposedly healthy companies such as BofA took over sick ones like Countrywide and Merrill Lynch (and became sick themselves as a result). At some point these mergers need to be reversed.

I would agree that one overriding policy goal which the country should adopt as a result of this financial crisis is the break up and future prevention of very large financial institutions.

This is not an issue of the government interfering in the private sector. It is an issue of the government doing what is necessary to maintain the integrity and health of the financial system and the economy as a whole.

Can rampant inflation from printing so much money, which impoverishes everyone, still be less “ghastly” than failing to guarantee the banks’ liabilities?

Or is it that economists and politicians stand to lose so much as individuals that they will continue to say that banking defaults are the greater evil for the community as a whole than runaway inflation?

In the fateful words of Sophocles: We must until the evening to see how fine the day has been.

Chaney, Paul K., and Anjan V. Thakor, (1985), “Incentive Effects of Benevolent Intervention, the Case of Government Loan Guarantees,” Journal of Public Economics, 26, 169-189.

This is exactly what happened with TARP I, you may remember.