There was so much in today's Wall Street Journal demanding a response that we got swamped. All we managed to get out was this squeak from the wheel and the above letter to one of the columnists. This proves beyond a shadow of a doubt that we need your help! Send some letters! Wake somebody up! If you're doing a lot of complaining ... make it effective. Send a solution along with the complaint, if only by linking to one of these blog postings.
There is a calm and reasonable response to the wave of financial panic spreading across the globe ("Europe Races to Shore Up Banks as Crisis Spreads," WSJ, 10/06/08, A1). The banking systems of the world should be restructured in accordance with the principles of prudent finance and, frankly, common sense. The subprime mortgage crisis, which initiated the current hysteria, is actually the best opportunity the economies of the world have had to put matters on a sound basis since the U.S. federal government privatized its immense holdings of land in the 19th century with Abraham Lincoln's 1862 Homestead Act.
The first step is to restore the faith and credit of government — all governments. This can only be done by restoring an asset backing to the currencies of the world. Beginning in the United States, steps should be taken immediately to establish "Homeowners' Equity Corporations," or "HECs." A HEC is a proposed for-profit, professionally-managed stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at their current market values.
HECs — like leveraged ESOPs — would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve under Section 13 of the Federal Reserve Act at a rate reflecting transaction costs and a revised risk premium, thereby creating an asset-backed currency. The homes could then be leased at a realistic market rate to their former owners or new tenants.
The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance, administration, and property taxes. Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt.
The second step is to cut all governments off from the money creation powers of their countries' central banks. A government must live within its means, and its means are determined by a country's tax base. In an emergency, the State can borrow at market rates from the existing accumulations of savings — but by doing so endangers its sovereignty and the liberty of its citizens, as Henry C. Adams pointed out in 1898.
The third step is to finance all new capital formation through loans from commercial banks discounted at the central bank. To ensure the optimal spread of economic power through the economy and provide a sound basis for economic growth, these loans should be made in a way that creates new owners of the capital in formation, leaving current owners with their accumulations intact, but opening up opportunity for those who currently lack ownership of the means of production. These loans can be collateralized by using the standard risk premium charged on all loans to purchase "capital credit insurance" covering 75% to 90% of the total amount of the loan. To make this even more secure, there should be a capital credit reinsurance pool, composed exclusively of cash, government securities, and the soundest of blue chip investments.
The fourth step is to limit the involvement of the State in the economy.
The fifth step is to establish free and open markets, in which every person can participate as a provider of labor, of capital, or both, within a just system of regulation that provides equality of opportunity, not results.
The sixth step is to restore the rights of private property, especially in corporate equity, most particularly in the right to receive the income from what is owned.
More about the Homeowners' Equity Corporation can be found here. The other steps are part of a proposal called "Capital Homesteading for Every Citizen," from the book with the same title. We can't continue to blame a vague and generalized "them" for our troubles. If we want things to get better, it's up to us to demand changes consistent with the principles outlined above.
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