Ten Stupid Policies That Will Prolong the Recession

Published November 12, 2008

1. Bail out the investment banks, commercial banks, insurance companies, Freddie Mac, Fannie Mae, General Motors, Chrysler, Ford Motor Company, with $700 billion, plus $100 billion in pork by Congress and a total bill at a trillion dollars or more. This does not encourage financial institutions to loosen up credit. It gives them a cushion of cash to sit on and tilts the negotiating field to favor the lenders.

2. Pay interest on the reserves that the Fed requires banks to hold. This gives banks a more attractive alternative than lending out funds to businesses, and it encourages holding more reserves than is optimal.

3. Put on a ban on short-selling bank shares, as the Securities and Exchange Commission under Chairman Christopher Cox has recently done twice, first on 19 banks and later on 799 banks. This identifies endangered institutions and guides potential buyers away from them. No wonder their share prices go down.

4. Follow the advice of Sheila Bair, chair of the Federal Deposit Insurance Corporation, to bail out the NINJAs (no income, no job or assets) who did not qualify for mortgages. This will not only cost the taxpayers more money, it will delay an already-complicated set of negotiations.

5. Enact legislation proposed by Sen. Christopher Dodd (D-CT) to give bankruptcy judges virtually unlimited discretion to rearrange terms for repayment of mortgages to favor borrowers. This will delay settlements and increase the cost of the bailout.

6. Adopt legislation offered by Sen. Charles Schumer (D-NY) and Sen. Charles Grassley (R-IA) to deny tax deductions for losses held by banks acquired by other banks in mergers. This will discourage the acquisition of troubled banks and divert bailout funds toward mergers with smaller, rural banks that are basically sound. This will stretch out the adjustment process and divert funds toward mergers and away from lending to businesses.

7. Promise to raise taxes on productive (and rich) entrepreneurs and divert the receipts to those who do not pay taxes. This will stifle economic growth and reward unemployment.

8. Have senators publicly announce when a bank is in financial trouble, thereby causing a run on the bank. The model to follow is Schumer’s warning that IndyMac bank in California was close to insolvency, which caused a rush by depositors to withdraw funds from their accounts. Never mind that such warnings are illegal in California and Schumer’s home state of New York–prosecutors are too busy pursuing senators who do not correctly fill out their income disclosure forms.

9. Continue to deny interest deductions from income taxes for all except home mortgages. This was instituted by the Tax Reform Act of 1986 and has been responsible for homeowners refinancing their mortgages in order to buy consumer durables such as automobiles, refrigerators, clothes washers and dryers, dishwashers, tuition, and a host of other purchases where interest on financing is not tax-deductible. This continues the unequal treatment of interest for tax reasons: interest income is taxed, but interest payments are deductible only for home mortgages.

10. Keep laws on the books, like Sarbanes-Oxley (2006), that have been proven ineffective in preventing or even moderating the credit crisis. Prosecuting business executives does not achieve beneficial results anywhere except in the political arena. Unlike rich politicians, movie stars, and TV celebrities, corporate executives get their money the old-fashioned way–they earn it while subject to the constant regulation by the market.

Jim Johnston ([email protected]) is a policy advisor to The Heartland Institute. His views are his own and not necessarily those of the Heartland Institute.