A Modest Proposal from Joe Stiglitz

"..."The government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice."

Joseph Stiglitz, the Nobel Prize-winning economist

This is the procedure, that is what we do with insolvent banks. That is what the FDIC is for.

We don't prop up the bad banks. The regulators help them become solvent through a resolution and restructuring of their bad debt, and then either sell them, sell their assets independently, or allow them to re-emerge as good banks once they are solvent

This is precisely what Le Café Américain has had on the menu for the banks over the past seven months, with some detail behind it, including systemic reforms.

We do not burden an entire national economy, we do not cripple an entire banking industry including many regional banks who have done no wrong, in propping up a few insolvent institutions who arrived at that state through outrageous bad management.

There is widespread suspicion that this exercise is designed to protect a handful of large money center banks from realizing their losses - JPM, C, Morgan Stanley, B of A, and Goldman Sachs.

Let the system work. Do not continue to privatize the gains and subsidize the losses.

And then let the criminal and civil investigations of the major actors in this modern tragedy begin, if we ever wish to 'restore confidence' in Wall Street in the public and the rest of the world.

Markopolos Delivers Multiple Bombshells in Congressional Testimony

"Government has coddled, accepted, and ignored white collar crime for too long.

It is time the nation woke up and realized that it's not the armed robbers or drug dealers who cause the most economic harm, it's the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most.

They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives."

Harry Markopolos in Congressional Testimony

Henry Markopolos, the Madoff Ponzi scheme whistleblower, is delivering bombshell testimony with few punches pulled before the US Congress this morning.

Among other things:

- There were 14 'feeder funds' operating with Madoff to channel investor to him. Only two have been publicly revealed. There are twelve more. Markopolos is going to be speaking with French and Swiss authorities to reveal others who have not yet acknowledged their role, and their losses.

- There are undisclosed investors in the Madoff scheme among prominent Europeans, and even royalty.

- Markopolos feared for his life because of the involvement of the Russian mob and South American drug cartels involved with Madoff, and because of the stonewall treatment his repeated and detailed disclosures received at the SEC.

- The SEC is overstaffed with young attorneys who do not understand the business they are regulating. They need to hire older hands with direct financial markets experience and accounting backgrounds and incent them.

- The SEC does not wish to pursue 'the big cases.' They prefer to act on small cases.

- The SEC has done little as compared to the State Attorneys General.

- The SEC has a problem described by others as 'deep capture' wherein the regulators look to jobs in their industry after a few years in the agency. Their management protects industry insiders from investigation.

- Madoff did not act alone. There were enablers who were willfully blind, and there were those who were directly involved with him in his deception.

- The SEC does not even have access to Bloomberg terminals or read the WSJ or Barrons

- The new head of the SEC, Mary Shapiro, needs to clean house with 'a wide broom' among the management of her new organization

- Markopolos was offered a job to head up a new super-agency several times by the Congressmen, only half in jest, but he demurred because of family commitments. Too bad because we have a hunch he'd soon be known on Wall Street as the "flagellum Dei" (Latin: "Scourge of God"),

Bad Bank Proposal is Bad Policy and a Symptom of Serious Problems in Obama Administration

Yves Smith nails this one.

Bringing in seasoned professionals has the upside of enabling quick action.

The significant downside is that you bring in old problems, old approaches, old conflict of interest, and old thinking.

As we have said previously, the challenge to Obama and his insiders will be one of leadership, to set coherent policy directives that will bring direction to the old hands consistent with a new reform government.

So far the Obama Administration is not succeeding. We have heard of conflicts of opinion between the old guard, Geithner and Summers, and the new circle under the president. This in part was the cause for the delay in announcing the bad bank this week.

The Obama Administration is still in the 100 day honeymoon period, but the constant stream of old guard appointments, and those with specific questionable personal tax payment records and performance in the Clinton Administration is grooming it for failure. They are spending precious political capital and goodwill senselessly.

We need them to succeed. Badly. They did not create this crisis, but it is their task to find a solution and prevent it from worsening.

But we ought not to kid ourselves or be quiet when they commit the kinds of gaffes which have characterized their first few weeks in office.

"The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was.

We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company.

Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting)."

Bad Bank Assets Proposal: Even Worse than You Thought - Naked Capitalism

Very Long Term Dow Jones Industrial Average Chart

Projections are for a longer term bottom between 4900 and 5750.

This will likely set up a new bull market after a period of consolidation and recovery that will have a longer term objective in excess of 20,000 (in inflated dollars.)

There will probably be a false start recovery after the lows that will really be a significant rally followed by a fifty percent pullback before the bull market can start moving higher in a more steady and measured way supported by improving corporate earnings.

There will be significant skewing perhaps as a large number of Dow Index stocks are replaced by other viable companies.