The American Spectator

Special Report

The Economic Recovery Plan

By Peter Ferrara on 9.24.08 @ 12:08AM

(Page 2 of 2)

The credit agencies seeing declining capital margins then downgrade credit ratings. Declining capital and credit ratings cause stock prices to decline. Financial institutions find that they must raise more capital to meet regulatory requirements. But the reduced credit ratings make this more difficult. Companies trying to sell assets to raise capital, particularly mortgage related securities, find this drives down the value of their securities further.

Panic sets in and no one wants to buy mortgage related securities, driving their value under mark-to-market regulations down toward zero. Balance sheets under mark-to-market suddenly start to show insolvency. This downward spiral shuts down lending to these companies, so they lose all liquidity (cash on hand) needed to keep company operations going. Stockholders realizing that they will be wiped out if the companies go into bankruptcy or get taken over by the government start panic selling, even when they know the underlying business of the company is fine.

This is how with only about 5% of mortgages in default, major companies with still solid underlying business operations, like Merrill Lynch, Bear Stearns, AIG, and even Lehman Brothers, find themselves suddenly bankrupt overnight. The companies would all have survived under the accounting rules followed for decades. But under the brilliant new mark-to-market regulations, increasingly widespread panic threatens the entire economy.

A Real Economic Recovery Plan
Earlier this week, former House Speaker Newt Gingrich posted at AmericanSolutions.com, a real, comprehensive economic recovery plan that would, indeed, get America booming again. Candidates can spend the rest of the fall running on this platform:

First, Gingrich writes, "the Federal Reserve should return to protecting the dollar against inflation." Indeed, the Fed should closely follow the "price rule" for the conduct of monetary policy, which is what the Reagan supply-siders wanted in the 1980s, and got for a while. This means that the Fed would be guided in its monetary policy primarily by seeking to maintain stable prices for a basket of commodities including gold. This would eliminate inflation over time, and smooth out the roller coaster boom bust cycles we have suffered in recent years.

Second, Gingrich writes, "the Federal government should return to a fiscal policy of controlled spending." Indeed, the new President next year should call for a package of $150 billion in spending cuts for the first year, which would be the equivalent relative to the size of the budget of the Reagan 1981 budget cuts.

Gingrich also writes, "[W]e should adopt a tax code which encourages investment, savings and job and productivity growth within the world market." In fact, we should adopt an optional flat tax system which would sharply reduce marginal tax rates for all taxpayers, creating the foundation for an economic boom. We could have one flat 17% rate, or 2 rates of 10% and 25%.

Gingrich also supports personal accounts for Social Security, which could be expanded over time to replace the payroll tax for all workers with a personally owned, family wealth building accumulation of assets. This would be a revolution in the personal prosperity of working people.

Of course, we should immediately end the mark-to-market accounting regulations that are creating a systemic panic in our economy. We should just reestablish the previous market value estimate rules. That would solve the short-term panic without the Paulson, $700 billion bailout package. Gingrich writes, "[I]t is pretty destructive to have artificial accounting rules ruin companies that would have otherwise survived under previous rules."

Gingrich calls as well for an "all sources, all of the above" American energy policy that "combines drilling for oil and gas, oil shale, clean coal, biofuels, flexfuel cars, wind, solar, hydrogen, and nuclear power into a deliberate strategy of creating the most abundant energy economy in the world. Gingrich writes, "The liberals in Congress have responded to the American people's anger over energy prices by trying to pass fundamentally dishonest bills which raise taxes and at the same time limit energy production while pretending to increase it. These dishonest efforts would actually make it permanently illegal to drill for oil and gas in most of the areas offshore."

Indeed, the news media should stop asking Barack Obama if his chair is comfortable and if he would like a glass of water, and ask him what his policy is to reduce gas prices. They would find he doesn't have one because he thinks high gas prices are good for the environment.

Gingrich goes on to propose reforms for health care, education, immigration, litigation costs, financial regulation, infrastructure, and other areas, all of which would further contribute to economic growth and booming prosperity for all. The plan is reminiscent of the Reagan economic recovery program in 1980, which had four components: (1) reduced taxes (2) reduced government spending (3) anti-inflation monetary policy that would restore a sound dollar and (4) regulatory reform.

This is a winning platform for this year as well.

Letter to the Editor

topics:
Taxes, Education, Health Care, John McCain, Barack Obama, Business, Social Security, Environment, Books, Law, NATO, Immigration, Energy, Oil