Four Ways to Help Us Out of the Crisis

Solution:To prevent bank runs, the feds must make it abundantly clear that the current limits on the FDIC should in no way mean that insurance is about to run out. Depositors must know that their cash is safe. In addition, the FDIC protection limit should actually be increased to multiples of the current $100,000 (it seems Jim Cramer agrees with me). While it might cost more for existing thrift failures being processed by the FDIC, the psychological impact of knowing you have a bigger umbrella will prevent potential bank runs and obviate the need for a massive FDIC bailout of a giant bank or thrift failure.

Problem No. 4: Grudging incrementalism plus a short-sale ban equals death spiral

As the fallout from Fannie/Freddie cascaded into Lehman, which then careened into AIG(AIG Quote), the Treasury devised yet another incredibly punitive, confiscatory "bailout": taking 80% of the equity in AIG in return for making an $85 billion bridge loan at an interest rate of more than 12%. Wow. When did the U.S. government get into the loan-sharking business? Was this seizure meant to engender confidence in our free market system?

The mistakes that the Fed and Treasury have repeatedly made since the onset of this crisis have been ones of grudging incrementalism. Each time they act, the timidity with which they apply Band-Aids instead of the required tourniquets ultimately results in even lower confidence in the system. Even worse, these Band-Aids are laced with a toxic ointment that kills both good and bad cells, so that the wound is never allowed to heal cleanly.

The culmination of these actions led to the harrowing near-deaths of yet another two bastions of Wall Street, Goldman Sachs and Morgan Stanley. It was the fear of government-inspired intervention and seizure that caused the run on these companies, not the "evil shorts," as the SEC and Treasury would have everyone believe. Yet, incredibly, the response was to ban short-selling of financials (and the list is expanding).