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An Essay by Justin Alexander

So we've slapped an ill-conceived and pork-laden bailout bandage onto the current economic crisis.

But that's all it is: A bandage. This bailout bandage contains no solutions for the fundamental problems that led to the current crisis. It's the functional equivalent of pulling over a drunk driver, taking away the bottle of rum he's clutching in his right hand, and then giving him back the car keys.

So the next step must be to address the fundamental failures that led to this crisis. It's the only way to prevent another.

(1) The lack of regulation that allowed unfettered greed to flourish on Wall Street must be addressed. This means re-instituting the regulations that have been obliterated by the last thirty years of bankrupt Republican strategy -- a strategy based entirely upon the facilitation of greed.

(2) The bad mortgages lying at the heart of the current crisis must be alleviated. Main Street has been guilty of making some bad decisions in its own right, but the middle class has also been victimized by predatory lending practices. 

This means that bad mortgages held by homeowners (not speculators) need to be re-structured to ensure reasonable and consistent monthly payments. Barack Obama has proposed giving bankruptcy judges the power to restructure these bad mortages, but in my opinion that's not good enough: If we see these people hurtling towards the cliff of financial ruination, we shouldn't wait for them to go over it before trying to pull them back up.

And this also can't be an effort limited to just bailing out those currently in trouble. It also means regulating the mortgage industry so that these types of bad mortgages can no longer be created. For example, adjustable rate mortgages were legalized in the same legislation that led to the Savings & Loan crisis.

(3) We can no longer slave our economy to the fate of a small handful of companies. Senator Bernie Sanders says that "if they're too big to fail, then they're too big to exist". 

Unfortunately, in the wake of the current crisis, we have actually exacerbated this problem instead of alleviating it. Mergers of the largest banks have resulted in even larger banks. This solves a short-term problem, but we've simply replaced it with a bigger problem down the road. 

The current crisis clearly demonstrates the truism that, the larger they are, the harder they fall. These large institutions, on which our economy is apparently completely dependent, must be broken up into smaller entities. We shouldn't be keeping all of our eggs in one basket.

(4) A happy balance must be found in regards to mark-to-market accounting rules. These rules (requiring that the value of assets be set to their current market value) were put in place as a direct result of Enron's abuse and downfall. The problem is that they tend to exacerbate downward spirals, particularly when applied to long-term assets, by creating and then reinforcing destructive pricing volatility.

The SEC has now been given the power to suspend the mark-to-market accounting rules. But if they exercise that power to simply remove yet another layer of protective regulation from the system, we're simply switching one form of economic catastrophe for another.

Newt Gingrich has proposed what appears to be a logical compromise between these two extremes: "Perhaps a three year rolling average to determine mark-to-market prices would be a workable permanent system."

And now I'll say something I rarely expect to say: I think Newt Gingrich is right. A three year rolling average for long-term assets evens short-term volatility in the pricing of those assets, without completely disconnecting corporate accounting from any kind of objective reality. (The rest of his proposals, on the other hand, are just the standard Republican refrain of "cut taxes and deregulate"... which shows a rather stubborn inability to learn from past mistakes.)

Now What?

That's the real question. I'll admit that I'm not an economic specialist. I don't know the best way to accomplish these things. (Although you probably couldn't go too far wrong if you started by rolling back most or all of the Garn-St. Germain Depository Institutions Act and the Gramm-Leach-Bliley Act.) But it's clear that these are things that must be done. 

Because simply slapping a bandage on an infected wound won't solve the problem. 

And, really, this is just the beginning -- a first step. Because the current and most immediate crisis we're facing is merely the tip of the iceberg. Years of mismanagement under Republican economic theories have left our economy fundamentally dysfunctional. We've got a lot of work ahead of us. But I think this is a decent outline for the first step in the right direction.