** First draft, 2008.Oct.27 15:45
** Comments requested. See bottom for contact info.


The current crisis divides into two parts, financial and housing.
The housing mortgage crisis is the basis of this all, and is
primarily in the United States. The financial crisis is a
consequence of the housing crisis and is world-wide. Both the
housing crisis itself, and the financial crisis, must be
alleviated. The financial crisis is more directly affecting other
parts of the economy, so it must be fixed first. But if the housing
crisis isn't also fixed within a short time, it will continue to
drag the financial situation back into crisis.


** Financial Crisis:

Financial institutions invested too much of their money in
speculation on the price of stocks, trusting that if they bought
stock at a price that was rising then later when they needed cash
they could always sell the stock at a higher price to somebody else
who was also speculating in the same way. This was all a confidence
game, much like a chainletter pyramid Ponzi scam, rather than sound
investment in longterm productivity of the companies that had
issued the stock. This whole scheme collapsed when anything
happened to shake confidence and stop the upward speculative
"bubble". Suddenly people needed to sell stock immediately to meet
immediate cash demands, and sellers were more then buyers, causing
stocks to drop in price, causing sellers to get less cash than they
needed, causing them to go bankrupt and default on their
obligations, causing other companies to suffer a cash shortfall,
causing them to likewise need to sell their stock even though the
price had already fallen terribly. All of these companies who had
too much of their assets in stock speculation, who didn't have
enough cash reserves to meet immediate needs, were making bad
investment decisions and deserve to suffer the consequences. Nobody
has the right to be bailed out of bad business decisions. These
companies should be allowed to go into official bankruptcy, and
then their assets can be sold at auction to pay for some small
portion of their debts. The government should now bid on these
assets at the auction, and buy up any that are so low priced as to
be a good longterm business investment. This should be effective
because while ordinary companies are short on cash and can't bid on
the auction, the government has much larger amounts of funds
available and can always make a bid.

An advantage to a company fully declaring bankruptcy is that it is
no longer legally required to directly pay its obligations,
including "golden parachutes" to the company executives who made
the bad business decisions in the first place. IMO (in my opinion)
these executives should wait in line to get "pennys on the dollar"
from sale of assets, just like all other creditors of the bankrupt
company.

Even before a company goes fully bankrupt, its stock may drop to
below its true longterm value, because sellers needing to get cash
outnumber buyers who have available surplus money to invest at this
time. At this time, the government should buy up all too-low-priced
stock whenever it becomes available, thereby investing money for
the long term, practicing the good business policy of "buy low,
hold, then sell high or just collect dividends over time". This
establishes a floor price on each company's stock, allowing people
in need of cash to sell stock at the government-guaranteed floor
price rather than allowing the stock price to continue to drop all
the way to zero. This allows people who made only slightly bad
investment decisions and need to convert stock to only a small
amount of cash to do so without needing to sell *all* their stock
and without going bankrupt. This reduces the number of sellers
relative to buyers, and thus reduces the fall of stock prices. The
more stock the government owns in any company, the more it can act
as "tiebraker" in regard to company activities such as investment
decisions. If so much of the stock is offered at the
government-floor price that the government can buy a majority
share, then the company has in effect been "nationalized" and the
government can get rid of officials who made bad investment
decisions.

A reasonable alternative that is now being used by Germany is to
make a deal with the company prior to bankruptcy, wherby the
government will purchase a share of the company by issue of *new*
stock in return for specific government control over some aspects
of the company. This is currently for banks. Specifically:
- Pay per company executive is limited to 500 thousand Euros per year.
- Dividends to stockholders are forbidden so long as the company holds
   (has not yet paid back) any rescue money.
- Companies must eliminate severance and bonus schemes deemed inappropriate.
- Government can force banks to eliminate risky investments.
- Government can force banks to lend to small/medium-sized businesses.
I approve of this idea. France seems to have adopted it likewise,
where all the major banks in France got together and joined the
plan together so that no one of them would appear weaker than the
others.

Companies in financial crisis, having insuffucient cash reserves,
and suffering huge losses if forced to sell assests at this time,
would thus have several possible course of action:
- Accept the government bailout per the German plan, with all those
   restrictions listed above;
- Allow stock to fall so low that the government can buy up a
   majority share, at which point the government *owns* the company
   and can institute far more strict control than listed above,
   such as completely firing the top executives;
- Alternately some other company may buy out the stock, forcing a
   merger, or a more "friendly" merger may be negotiated.
- Formally go out of business by declaring bankruptcy, at which
   point "golden parachutes" are no longer payable except via
   bankruptcy court, and the government can then buy up assests
   piecemeal.


** Housing (mortgage) crisis:

Ordinary citizens made the same kind of mistake that large
investors made: They saw a rising market and trusted it'd continue
to rise forever, and essentially bought overpriced homes on the
expectation they could later sell to another investor at an even
more inflated price. Again this is essentially like a chainletter
pyramid Ponzi scam. But what's worse is that people who had no
money to buy a home were nevertheless able to get a mortage with
low starting interest rate and little or no money down, thereby
owing far more money than the house was really worth, expecting
that interest rates would stay low so that they could continue to
make mortgage payments, and housing prices would continue to rise
so that if they needed to sell they could sell at a profit to pay
off the mortgage and have some cash remaining to re-invest in
another home or rental or savings. These people should never have
been allowed to "buy" a home, and they don't deserve special
protection. They should all lose their homes unless they can find a
way to make payments on the mortgage. For example, they could rent
their home to somebody who had more money, use the rent to pay the
mortgage, and use their own limited income to rent a smaller home
or apartment. But if they can't make such arrangements, and they
can't find a buyer for their house who will pay at least as much as
they "owner" still owes on the mortgage, then the "owner" should be
allowed to default on the mortgage without needing to declare
bankruptcy, and move into some smaller affordable rental property.

At this point, the government should offer to buy up these
forclosures at or below their true longterm value, and rent them
back to the "owners" at a fair non-profit rental amount, if they
can afford the rent, else rent them to somebody else who can afford
the rent. The government could even hold an auction on the amount
of rent, renting to whoever offers the largest rental amount, even
if that amount is less than break-even for the government. A new
auction could be held each month, and if somebody bids higher then
the current rent and the current renters can't afford that much
then the current renters are given 90 days notice to vacate to
allow the new renters to move in and pay the higher rent.

So what about people who lose their jobs due to the recession and
due to mergers between financial instutitions and bankruptcies of
large companies and cashflow problems causing small businesses to
be unable to meet payroll? How are such people to pay the rent,
even the greatly reduced rent, to avoid becoming homeless? I
propose a new public-work program, similar to the Depression-era
WPA, but mostly conducted over the InterNet. Work that must be
performed in-person, would be performed in the same way as it was
during the Depression, but management and accounting and notices of
job openings and formal hirings would be done mostly over the
InterNet, with only the actual labor performed on site, and the
employee getting paid the Federal minimum wage for hours on site
working or available for work per agreed-upon work hours. Most work
would be of an information-processing nature, and could be
performed entirely over the InterNet. Employers, mostly the Federal
government, would post requests for bids, and potential employees
would make bids as to how long they would require to perform the
task. To prevent cheating, only a bare idea of the task to be
performed, not the specifics would be posted for bidding. As soon
as a winning bid is registered, and that bidder is online to start
work, the full specification of the task is presented, and the
bidder can give final acceptance (and penalty for failure to
satisfy contract) or decline the contract and allow somebody else
who had made a higher bid to take the contract instead. Timing
starts from the moment the employee is provided with the details,
and ends when the employee submits a full report in satisfaction of
the contract showing completion of the task. If the employee takes
too long, longer than he/she bid, the contract expires, the
employee pays the penalty for failurel, and the employee is then
not allowed to submit a late report, and the task is put up for
auction again. The employee might bid on the new contract, but
since only a skeleton specification is posted for bids the employee
doesn't know whether this new contact is the same exact one where
he/she has already done most of the work or a different but similar
one, so it's a gamble for that person to bid really low in order to
get the new contract and hope to simply re-use the
already-completed work for the new contract on the same task. The
penalty for failure to complete a contract thus mimimizes cheating.

The government can also set up public computer labs in many local
communities, so that people who are homeless or otherwise don't
have InterNet access from home can get access to the
contract-bidding system and the in-person work situations, make
bids on the former and register for appearance at the latter, and
then upon winning an online contract by making the lowest bid can
actually perform the work at the public computer lab.

For in-person jobs, initial preference in appointments would be
given to those who have been unemployed the longest time, and those
who have earned the smallest amount of money during various recent
time spans such as five or ten years, a partial ordering that
balances the work across all the available workers, unlike the
current system where people who already have jobs are favored in
hiring and people who get unemployed have a very difficult time
ever getting hired again. Only a small amount of work would be
assured to each new employee, just enough to determine how well
that person was at the job. If a new employee does a good job,
he/she is kept longer and guaranteed some share of work on a
regular basis, although typically not a full-time job, just
whatever share is fair to balance the available work among all the
potential employees. If the new employee does a bad job, he/she is
dismissed unfavorably, and must get back in the potential-employee
queue at the end for trying again later after all other potential
employees have been tried once each.

The government can issue reports to each employee as to
performance, like a "letter of recommendation/reference", to aid
such employees at getting a regular job at higher than minimum wage
later, assuming they did a good job of course. Those who slack off
would not only lose their WPA job and have to wait in the queue to
re-try later, but would get a bad recommendation which would
discourage regular employers from hiring this person. Thus everyone
who does good work but has been unemployed would get trial work
through the WPA and a good recommendation and have a good chance of
getting regular employment once again.

Thanks to this new InterNet-WPA, everyone who is willing to work to
earn some money can do so, even disabled people who can do only
limited types or amounts of work during limited times, so that
nobody would be without some earned income, except by choice. Thus
everyone could afford *some* place to live, even if at a very small
place owned by the government (via foreclosure auction) where the
rent has been lowered due to lack of higher bids. Nobody would be
homeless except by choice.

Thanks to everyone having some earned income, nearly everyone would
have some discretionary spending money, which would buy goods at
local stores, which would "trickle up" into the economy, reducing
the number of small businesses that have to lay off employees,
increasing the number of jobs available, reducing the load on the
InterNet-WPA as employer of last resort.


** More specific ideas:

Our Federal goverment should appoint a team of experts to set
lower/upper limit on value of each major stock, each with a portion
of the Federal rescue fund available for immediate spending. Then
whenever shares of the stock become available at less than the
minimum value, that expert would buy whatever stock is available at
that price, up to the limit of his/her portion of the fund
available. If that expert runs out of funds, others who agree may
buy up the remaining shares. Then when the economy recovers and the
stock can be sold near the maximum value, it should be sold, taking
the government out of that part of the market, and returning the
original investment plus the difference between high and low value.
When there are wide market swings such as occured a couple weeks
ago, the government may buy and sell stock for a profit within just
a few days, paying back some of the national debt as well as
stabilizing the market. But more commonly the government would hold
the stock for several years until the price is right for selling.

I personally estimate that 8000 is the minimum value of the Dow
Jones Industrial average. Accordingly a couple weeks ago when that
average dipped below 8000, the government should have bought
whichever stocks within that average were most depressed, which
would have stopped the average from staying below 8000 even as long
as it did. Then a few days later when the average rose above 10000
briefly, the government could already have made a nice profit.
Today (Oct.27) the Dow Jones Industrial average is near 8100, so
now might be a good time for the government to start purchasing a
few of the most depressed stocks.

For medium-sized businesses which have more than $100,000 or
$250,000 cashflow per payroll cycle, thus can't keep it all in
FDIC-insured deposits, I suggest staggering payroll cycles for
various groups of employees. For example, each separate branch, or
each separate retail store, could have payday on a different date.
Computer technology is well able to support such a system. During
each month, income arrives from all branches or stores, and
expenses occur in various places, and net profit comes in overall,
but payroll occurs at just one branch or store. Thus funds on any
given day are shifted from all the other places to the one branch
or store that is making payroll today, and the next day it shifts
to another, and never does the company have a huge build-up of
profit just before global payday.


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