Some thoughts on the global crisis.

In some ways the current global financial crisis could be a long-term good thing. Here are a few reasons why:

• Without a major crisis following 8 years of Republican control of both the executive and legislative branches, the Republicans would be able to block any fundamental change.
• Without a crisis big enough to cause Alan Greenspan to say he made a mistake, big enough to make a massive bailout or partial nationalization obviously necessary, it would be impossible to push for major changes in the legal and regulatory basis of the financial system.
• The clearly acknowledged need for a fiscal stimulus package could enable fairly large expenditures on the policy priorities progressives would have anyway.

Most of these proposals probably won't be pursued, even in a strongly Democratic administration, but these would be my plan to solve the current financial woes.

Making sure it doesn't happen again

• As I understand it, part of the problem with credit default swaps (CDS) was that they are fundamentally functioning as insurance. But insurance companies are required to have sufficient liquidity to pay out a regulated percentage of their total obligations. No such requirement was placed in the CDS market. Clearly the law should be that anything that essentially is insurance, must be regulated as insurance. No loopholes.
• The other part of the problem was that firms securitizing mortages were not banks, and therefore avoided many of the transparency and regulatory requirements that banks work under. So when the value of the underlying assets came into question, no one had any way of knowing the extent of the problem, causing uncertainty out of proportion to the underlying problem. Even now, most of the mortage-backed securities are probably worth quite a bit (since most houses are not in foreclosure, and even those that are are worth something). So again, the law should be that all financial firms need to operate under similar regulatory and transparency requirements. It also goes without saying that regulatory laws actually have to be enforced. http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216
• The last part of the problem was the securities ratings agencies, who granted high ratings to securities that turned out to be bad. Pressure to keep income high by giving the ratings their customers wanted outweighed caution over the long-term risk of making a bad call. An obvious solution to this is to require that all ratings come with some level of bonding or insurance. If the underlying security fails or loses significant value, the bond is paid to the current holder. The cost of this needs to be bourne by the firm buying the rating. Only this approach would offset short-term thinking, and would actually bring the whole range of ratings into play as valid information (lower ratings would be less expensive to purchase).
• Implement a 3-year corporate and business tax holiday. Big corporations don't pay much tax anyway, and the cost of compliance and accounting is high for businesses of any size. Federal revenue should come from a progressive personal income tax. If the response to the holiday is as positive as I expect, it could be made permanent. Businesses create jobs and fuel the economy. They are competing globally with companies in developed countries with national health care, and in developing countries with no health care at all. If companies are relieved of the costs of health care and corporate income tax, they should be able to compete on a level playing field. http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

An Underlying Problem: Health Care

A major cause of difficulty for U.S. companies is the cost of health care. It has been pointed out that most countries with universal health care enacted it by extending an existing system to everyone. I would say the U.S. has three distinct payment systems, and three major delivery systems. 

The three distinct payment systems are 

1. 1) private, employer or individual payed, insurance, 
2. 2) Medicare/medicaid and other direct governmental payment systems, 
3. 3) the Veterans Administration. 

The three delivery systems are 

1. 1) private, for-profit hospitals and private medical practices, 
2. 2) private, non-profit hospitals, and 
3. 3) the Veterans Administration system of hospitals.

We should enact universal health care by:

1. Extending the VA system to all direct dependents of any current or former veteran.
2. Extending the Medicare A,B,and D to all unemployed, employed who recieve no employer-provided insurance, and all children under 18 who are not covered by a parent's policy. Children under 18 should all get vision, dental, and hearing coverage as well. If needed, Medicare should add an effort to make routine and preventive care easier to get. Means-tested co-pays should be part of the picture.
3. The government should offer a basic, standard insurance policy to anyone who wants it, with no exclusions, at a reasonable price (e.g. $3000/year for individuals, $5000 for families). The goal of setting this policy package and price should be do provide a benchmark private insurers could match, but which will force them to be competitive with the government policy and each other.
4. Take positive steps to directly support and incentivise non-profit health care/hospital systems. Ultimately, the goal should be to remove most large-scale, for-profit components of the health care system. With some limited exceptions, health care is simply an inappropriate industry to respond to a free market: The consumer is rarely the one who pays. The consumer has very limited access to information about options for getting the product. Usually when the product is needed, there is no time to weigh multiple options even if information was available. And the consumer doesn't have the choice to 'not' purchase the product.These are all features of markets where price responds to competitive pressures. For-profit providers have a strong incentive to over-test and over-treat in order to maximize billing. Insurance companies and HMOs have a strong incentive to deny even desperately needed care. Neither of these are good for the patient.

http://www.newyorker.com/reporting/2009/01/26/090126fa_fact_gawande

Other Health Care Initiatives

• A (partial, graduated) tax credit should be granted for supplemental insurance purchase in the private market. This is a bone to blunt the worst of the objection from health insurance companies. They should like this because this is where the big profits are anyway.
• All private health insurance/HMO policies should carry a mandatory life insurance rider. This provides an incentive for insurance companies to pay for care that will actually preserve the life of the patient. As it is now, if they can deny care, they will.
• Universal prescription drug benefits for generics, again with means-tested co-pays. Yes, the universal plan will only pay for generics.
• Again, a tax credit should be granted for supplemental prescription coverage purchased on the private market.
• Congress should review the drug patenting process, possibly limiting the exclusivity time. There should also be a provision for the government to exercise imminent domain for drugs, i.e. the government could choose to buy out the rest of the patent life of a drug for its market value, opening it up to generic manufacture. This would actually be a boon to the drug companies, since if they have a great drug they can cash in without spending on marketing.

Addicted to Oil

• Immediate large investment (~100B yearly) to increase funding for basic science in physics, chemistry, nanotechnology, materials science (by way of the DOE, NSF, grants to university programs), all of which are fields with potential benefits to green energy production and distribution.
• Construction of a public electrical distribution backbone connecting all four corners of the continental U.S. with each other, and providing tie-ins to the central states and wherever renewable energy production is feasible (great plains for wind, southwestern deserts for solar, northwestern and northeastern hydro power, and offshore wind areas as well). Such a backbone would be helpful even with current transmission technology, and would be a huge benefit when superconducting electrical distribution becomes technically feasible.

A More Fundamental Problem

All the discussion above is good and valid, but I can't help but think that ultimately there are deeper causes. A quite perceptive post on Slashdot of all places reminded me of the gist of my thoughts, but the poster put it as well as it could be put:

by aussersterne (212916) on Friday January 15, @07:08AM (#30777434) Homepage:

One particularly unhelpful wrinkle of the U.S. version of capitalism + culture has been investors' singular motivation to hit it big and rake in the bucks and a general social unwillingness (management, the population, investors, regulators) to believe there is any social good in any business that does not generate massive returns and growth on a quarter after quarter basis. There are simply many things that we need the economy to do that are not going to generate double-digit returns and result in world domination by a single sexy corporation. Plumbing, for example. Or reference publishing. Or wood milling.Instead of taking sustaining business + paying employees or small but steady growth as good enough within the context of also employing people and providing a necessary social good, we're happy to say "This hospital isn't giving us 20% year-over-year; it's only giving me 1%! I can get that from a damned CD! Fuhggedaboudid." And nobody bats an eyelid, everyone takes for granted that a hospital is only valuable if it's nice and profitable, otherwise it "couldn't compete" and "should" close in a free market economy.