A libertarian socialist engineer solves the financial crisis

The permanent solution to the bankster problem

Transparancy is more powerful than regulation.

The Too-Big-To-Fail Organizations must lose the right to financial privacy. This will put an end to them exploiting everyone else. We have learned that regulators cannot be relied on. Accountants likewise. The information must be public.

Why did we have a financial freeze-up on Sept 18, 2008 blackmailing congress to bail them out? Because the financial institutions did not trust one another. They didn't know whether their counter parties could meet their commitments. Many still cannot trust their counterparties or even properly evaluate their own holdings because these holdings depend on secrets of other organizations. Put that information in the public domain!

The fairness of the free market concept applies only in the presence of information symmetry. Financial organizations thrive by hiding information. They'll complain bitterly about their ``trade secrets''. These are not trade secrets about engineering, medicine, and productive enterprises; they are trade secrets on manipulating government and people.

Let a Tobin tax apply to all big (over $10 million) contracts. Any such contract should be unenforcible (gambling debt) unless it is registered with the government.

Americans generations back learned that insurance companies cannot be allowed to write their own contracts for consumer insurance. When they did, people having losses commonly discovered their insurance contract was written to weasel out of payment. Information asymmetry in action! Thus, for many years now every(?) state has an insurance department regulating insurance contracts that companies may write to consumers.

Both Democrats and Republicans are now in the grip of the banking class.

The Engineers versus the Oligarchs

by emeritus professor Jon Claerbout, Stanford University, National Academy of Engineering

Let us replace the finance "industry" run by law and econ grads of Harvard and Yale.   People are too corruptable!   Let us replace it (most of it) by a computer program written by grads of Stanford and MIT!

Financial industry profits as a share of all US industry profits has recently been as high as 40%.   Obscene!   Paul Krugman writes, "There's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks", so let us begin plans to replace them by software.

Once in the past Elizabeth Warren understood the banking industry's effects on Hillary Clinton. They both have really changed!

1. My nephew buys $2 cup of coffee on his debit card and finds he must pay (BofA) a $40 finance charge. Stated as an interest rate, I calculate the finance charge as 12*40*100/2 = 24,000 percent!   Predatory lending or loan sharks?   What kind of morality lesson is this to our young? No wonder people hate lawyers! Force lenders to state all loan fees as their interest-rate equivalent, and then subject them to usuary laws.

   
   

2. All contracts greater than $10 million should be invalid unless a copy exists in a government computer.

   
   

3. In time of financial crisis, the government should offer generous loans to taxpayers based on their paying history. Many would use the money to pay down their mortgages, putting money in the hands of bankers, saving the banks. My proposal does not transfer money from one class to another; it transfers money from taxpayers to taxpayers, hence it is value neutral, politically acceptable, and thus scalable to any needed degree. It's a solution that is not easily corrupted by Washington insiders (think Freddie and Fannie). IRS knows how much taxes you have paid in the last some years. IRS knows how to get the loans back. IRS has the machinery to start the program fast.

   Let the taxpayers decide what to do with their quick new cash, pay off a credit card, pay down the mortgage, save it in a bank, invest it in a market, or spend it in Detroit or in Alabama.

   In my generation, the Democrats took money from the rich and gave to the poor. Now they take money from the taxpayers and give it to the bankers!   Crazy!

   Specifically, over the next year (2009) anyone should be able to borrow money interest free from the federal government. Amount limited to taxes paid over the last three years. Repay capital at a rate of 10%/year. Available to businesses too!   Flexible.   Who needs a "multiplier" for a politically neutral program that can be scaled up fast?

   When the government collects money for social security, they should invest it somewhere real, like mortgages for tax payers. Don't put it "in a fund"!

4. Home sale? mortgage? Don't let the lawyers handle it. Imagine each auto/home insurance company drew up contracts with its own lawyer. Chaos! No consumer would know what they were buying. There are state divined standard policies we all must chose from. Likewise mortgages should come in standard forms chosen by the government suitable for putting on the web. Harvard professor Elizabeth Warren proposes a consumer financial protection agency.

   All mortgage information belongs in a government data base suitable for use by researchers and tax men. May as well go some steps further and cut out the middle man. Let the government hold the money. This is not rocket science requiring big brains and huge commissions. Now the bankers get cheap money from the government that they lend to the public at high rates. Foolishness!

5. The federal government provides a secure bank account for every citizen. This account is insured by the federal government. No private financial organization should be insured by the federal government.
   1. Each citizen account has two numbers. A public number for anyone who wants to give you money and a private number for when you want to ask the government to pay someone for you. They've had this in Europe for 50 years. No need for a credit card company to soak your vendor (passed through to you) for 3% every time you buy groceries or gas.
   2. You no longer need a checking account.

6. Gather ideas for code specification. Much of the paper work of the financial world belongs in a government computer. It would certainly limit the possibilities for fraud, and lower the need for fees. In many countries all large financial transactions must take place through a government bank. How much of all financial transactions could be replaced by a centralized computer depository? Perhaps all of it. It's time to gather ideas, to call for proposals.

7. Kill Fannie and Freddie! Fannie and Freddie would not exist without government funding. Yet we find them paying their officers tens of millions of dollars/year while lobbying congressmen and senators and advertising on TV how wonderful they are.

8. New tax bracket, 90% tax bracket for anyone making more than the president of the USA -- retroactive two years. Rates were higher than that in 1963 (historical rates). Pay restraints at any state-backed institution!

9. Outsource the data processing for all this to a consortium of Google, IBM, Oracle, and Microsoft.

10. Let Engineers run the country instead of Bankers, Lawyers, and Economists.

11. Toxic assets? Don't allow those who created toxic assets to benefit from unwinding toxic assets. Fire them instead!

12. Here's a book that should have been entitled, "Transparency Eliminates Fraud: Ending the world's ongoing financial plague with Limited Purpose Banking (LPB)"

13. Mortgages for the poor: Institute a 10% tax on landlords that flows into a federal savings account in the name of the renter. The renter can draw from his account only for a home mortgage, or at his retirement.

14. Finally, a technicality for engineers: Wizard economists tend to blame the Gaussian assumption for their failure -- the black swan. Another assumption that can fail is the stationarity assumption -- that the statistics of yesterday are like those of tomorrow. Predictability is lost even in a wholly Gaussian world if variance and covariance change with time. As an exploration geophysicist I see many attempts to analyze terabytes of data for petroleum exploration. More often I see failure in stationarity than in gaussianity. Especially covariances can change unpredictably and rapidly. Paraphrasing a physicist, "Economics amounts to perfect interpolation and meaningless extrapolation."

Congressional testimony 8 minutes (4/20/2010) by William K. Black, the guy who got a thousand convictions after the Savings and Loan crisis of the late 1980s. How many convictions did Obama get after the fifty times worse 2008 disaster?

Clear PBS video by Bill Moyers and professor Black.

Very clear 15 minute lecture by Stanford professor

A respectable web site with up-to-date information and intelligent analysis is: Naked Capitalism.

I suggest you subscribe to them with "reader" software. Now available in book form 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak. Also book of Yves Smith: ECONned: How Unenlightened Self Interest Underminded Democracy and Corrupted Capitalism

Want a page turner? Try Griftopia, by Matt Taibbi

What ancients can teach us about debt forgiveness (skip the wordy 1st page; and jump down to the interviewee)