Rethink taxes, revisit the home-mortgage deduction, regulate the investment banks and hedge funds.

Repairing some of the worst Bush administration screw-ups.
April 4 2008 1:59 PM

The Economy

Rethink taxes, revisit the home-mortgage deduction, regulate the investment banks and hedge funds.

With President Bush's approval rating hovering in the 30s, just about everyone has an opinion on what George W. has done wrong in the past seven years. But not everyone can explain what the next president must do to fix it. So we've called in some experts to tell us. Fixing It is a 10-part series to be published over the course of the week by some of our favorite writers, offering detailed policy prescriptions for the next president, whoever that may be, on how to quickly undo some of the damage that's been wrought. One of our contributors wryly describes the series as "News You Can Use. If You Happen To Be President." Read the other entries here.

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Regulate the investment banks and hedge funds.We should consider establishing capital requirements and an FDIC-like body for investment banks and hedge funds. Currently, these institutions are largely outside the purview of banking regulations. But the walls separating the different components of the system have broken down. Financial institutions have taken on obscene levels of debt in an effort to goose profits. But as we've seen, when a firm like Bear Stearns, or publicly held vehicles like Carlyle Capital, sport $32 of debt for every dollar of equity, things don't have to go too badly in order for the boat to sink. The problem: In today's hyperconnected, hyperleveraged, and hypertraded financial market, the failure of one hedge fund or one investment bank can have catastrophic systemic implications. The bailout the Federal Reserve orchestrated last month wasn't a bailout of Bear Stearns; it was a bailout of the hundreds of firms that were counterparts to Bear. If they're going to come to the Fed for help and make a claim on public assets and public credit—as Long Term Capital Management did in 1998 and Bear and other investment banks did in 2008—then they should be required to submit to capital requirements and pay into a stabilization fund that can be tapped when the next disaster strikes.

None of these measures would prevent the next bubble from forming. (To do so would require an act of genetic human engineering on a massive scale.) But each of them would help restore some sense of equilibrium and sanity to a system that is full of imbalances. Economically, politically, and socially, American taxpayers can't afford to subsidize the reckless speculation that has been cleverly disguised as investment strategies.

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