As the crisis deepens, "too big to fail"- banks are getting even bigger. Bailouts for banks that are "too big to fail"- and getting bigger are problematic for a couple of reasons. First, they increase moral hazard. Why should banks change behavior if they expect to be bailed out for making similar poor decisions in the future? Two, the bailouts are akin to putting a band-aid on a cancerous tumor if the causes are not identified and addressed. Unfortunately there is no partisan cure for this cancer.
If bailouts are approved, they must be accompanied by bipartisan congressional investigations since they raise moral hazard. If CEOs and their boards are found guilty of bilking their shareholders (short selling company stock after books were cooked and before the bad news was unloaded), severance packages need to be confiscated and cots in federal penitentiaries assigned.
Political campaign contributions from "too big to fail"- banks paid to members of Congress and presidential candidates should be collected and used to offset the cost of the bailouts. This will begin the process of making government more accountable. This, however, is not enough. Elected leaders must be held accountable for all contributions received. One hundred percent transparency in DC is a must. A bipartisan website is needed to display sources and amounts of all contributions.
After markets recover and bailed out "too big to fail"- banks have paid back tax payers, the next Congress and President should follow Teddy Roosevelt's mantra of "bust the trusts."- Freddie Mac, Fannie Mae, and other bailed out banks should be busted into several competing companies. If such a quagmire should ever resurface, busted up "too big to fail"- banks will not be too big to fail.
Congress and the President should roll back CRA and mark-to-market accounting, restore mortgage lending standards, and increase mortgage transparency.
Seemingly unrelated is U.S. energy independence. Congress should follow up lifting the offshore drilling ban with rules that streamline construction of new generation nuclear power plants. Projects that harness the wind, sun, and earth (geothermal) should be pursued as well. As is done in Alaska, royalties from these projects could accrue billions of dollars into the US Treasury rather than flowing overseas, which could help offset the cost of the rescue.
Finally, the Fed's mission should be altered to avoid the problems that were created when it lowered the federal funds rate to forty-year lows.
Bailouts by themselves will not cure the cancer. If this is all that is done, the cancer will wield its ugly head in the all too-near distant future. If this band-aid is all that is done, we should consider outsourcing Congress, the Presidency, and the Fed to low cost labor from India.