Tag Archives: Sheila Bair

How to End the Great Recession.

And, dramatically reduce unemployment, create 4 million high paying jobs, eliminate the retirement savings crisis, solve the student loan bubble, create unprecedented innovation, stoke social security and Medicare, and do actual real good in the world. Sound incredible? It isn’t. Follow along.

I want you to think about 10 people you know who are under or un-employed and write down their names, and under each write down the first three skills that come to your mind, even if they don’t seem like skills (e.g. she’s patient, a nice person, and she treats people with respect). Then, think of the one thing that you have always wanted to do (could be anything, including hiking across the country, baking the best chocolate chip cookies, driving an 18 wheeler across Alaska, inventing 5 new cocktails, writing that book, opening that restaurant with your grandmother’s recipes, anything.).

Now, create 10 jobs for those people whose names you wrote down, and write down what each person’s role would be. Then, figure out how to monetize your dream. Write down the amount of money you think you can make each year starting with year one, and then do the same for year two and year three. Next, figure out how much money you will have to spend to get that done. If your spending rate is higher than the money you will make, cut the spending until you show a profit. There. Now, you have a business plan.

What? You can’t figure out how to make money hiking across the country? How about a theme? How about interesting cities? How about a camera? How about a diary? Do you think Ken Kesey had a plan? You don’t know who Ken Kesey is? That’s OK. I KNOW you can come up with a way to make money at whatever your dream might be. 

Maybe you think you are not worthy. We all have self-esteem issues. Especially people like Paul Allen, Bill Gates and Larry Ellison. As you probably know unless you are living under a rock somewhere, all three men dropped out of college. None of the three of them invented anything.


All three of them used someone else’s invention to start them on their path. All three of them became dirty, filthy, and ridiculously rich. Doing what? Doing what they loved. Gates played with very rudimentary computers. Computers that would make the Apple I look like a Fujitsu K by today’s standards. Allen loved writing software in BASIC, a language that is dumber than the firmware that connects your keyboard to your PC. Then, after hooking up with Gates and finding IBM in a stupid marketing pinch for its entry into the PC market without an Operating System, bought a product called Quick and Dirty Operating System (QDOS) from a random programmer in Seattle named Tim Paterson, for $50,000, sold licenses to IBM, and the rest is Microsoft. While working as a grunt at Ampex, Ellison ripped off a relational database scheme described in a paper written by Edgar Codd, and used it on a project for a database system for the CIA. That became Oracle. How’s your self-esteem doing now?

So, you have your business plan, and you have your future employees identified, and your self-esteem is a little jacked up. What do you do now?

Before I lay out my plan to End the Great Recession, I should mention that a similar (though tongue-in-cheek) plan was proposed in an article by Sheila Bair, the former head of the FDIC, which she called the “Get Rid of Employment and Education Directive.”  But, not to be confused with hers, my plan is anything BUT tongue-in-cheek and here’s how it goes:

1) The Fed agrees to loan $400 Billion to the “American Future Entrepreneur Growth Fund” (it has no corny acronym, so it might have trouble passing Congress), at an interest rate of .5%, the exact same rate it charged the 6 big banks it lent $9 Trillion to back in December of 2010. This amount by the way, is half of the TARP bailout that saved the biggest investment banks in the world with your tax dollars, back in 2008. Half.

2) The AFEGF is organized like a Venture incubator, and the first thing it does is hire 100,000 really good recruiters who are then tasked with finding the most promising 400,000 entrepreneurs in the US, with fungible business plans. This will take 6 months. The criteria are a track record of entrepreneurship in one form or another, successful or otherwise, a business plan that passes a few tests, and the passion to do something big.

3) Those entrepreneurs are each loaned $1,000,000 and are given a goal of 3 years to turn that loan into positive cash flow. They must immediately hire 10 people from their list and assign them roles. They are each assigned a mentor from the VC community who VOLUNTEER their services to guide these start-ups to success. VCs like Joe Rizzi, Val Vaden, Don Dixon and Vinod Khosla who are all about making really smart investments and guiding them to ridiculous profitability, while looking for ways to make a positive difference in the world.

They will also be assigned community mentors. People like Joy Amulya from Global Family Village, Shawn Ahmed of the Uncultured Project, Beth Kanter and Allison Fine of The Networked Nonprofit, and  Craig Kielburger of Free the Children, to help entrepreneurs focus on global community projects where their energy, capital and spirit can turn their entrepreneurship into real and lasting good.

The entrepreneurs are each assigned a regional incubation lab where they will work out and implement their plan. The incubation lab will be staffed by accountants, sales and marketing leaders, PR, Advertising and communication consultants, lawyers, human resource professionals, and prototype design and manufacturing engineers who will provide the back-office infrastructure for 100 separate entities. The entrepreneurs agree to quarterly board meetings where their mentors review progress and manage their growth track. At anytime along the way, the entrepreneurs can use Crowdfunding to raise additional capital, allowing a whole lot of ordinary people to get a piece of this amazing action, and to potentially create even greater wealth.

4) There will be NO RULES (operationally).

5) At the end of this 3 year period, the Fed will either be re-paid the loans with interest or optionally be able to take an equity stake in the most promising enterprises, equivalent to their loan amount, and over a 10 year period, will recoup all of the money lent to these enterprises as the result of a 1 in 20 success rate (for every 20 start-up who fail, there is one who becomes the next Google, Facebook, Adobe, Apple, Microsoft, etc. These are the odds that the VC have been gambling other people’s money with since the late 1960’s and history says it always works).

That’s it.

If these 400,000 start-ups fail and succeed at the historic rate of Silicon Valley start-ups, they will create over 5 million jobs. They will re-pay all of the debt several-fold to the Fed and they will have solved at least 5 significant world problems. Along the way, their employees will have fully funded Social Security and Medicare for the next hundred years and created more wealth and innovation than the world has ever seen. Including a sustainable, endless and ultra-cheap alternate energy source. Trust me. I’ve done the math.

After Gates sold QDOS to IBM, Big-blue hired Microsoft (13 random guys and girls) to build their next release operating system, OS/2 for their cool new PC. Gates, by this time, was smart enough not to transfer the copyrights for QDOS or the new OS/2 to IBM, believing that there would be other hardware manufacturers of the new PC in the immediate future. Then, due to design differences, the IBM/Microsoft partnership broke down allowing Microsoft to go off and become, well … Microsoft.

You can argue with and debate my plan, and I agree it has holes, and there are always tons of devils lurking in the details, but there are always holes and devils in every plan, and there is also the undisputed history of the Silicon Valley and Microsoft and Apple and Google, and the unfettered tenacity and passion of the American people. And, you can’t argue with that.


Where Is the Volcker Rule?

Three years ago, a financial crisis threatened to bring down the United States economy and to spread economic disaster around the world. How far have we come in preventing any kind of recurrence? And will the much-discussed Volcker Rule – attempting to limit the risks that big banks can take – play a positive role as we move forward?

Bad loans were the primary cause of the 2007-8 financial debacle. When the full extent of the problems with those loans became apparent, there was a sharp fall in the values of all securities that had been constructed based on the underlying mortgages – and a collapse in the value of related bets that had been made using derivatives.

The damage to the economy became huge because these losses were not dispersed throughout the economy or around the world. Rather, many of the so-called toxic assets were held by the country’s largest banks. Financial institutions that used to lend to consumers and businesses had instead become drawn into various forms of gambling on the booming mortgage market (as well as on commodities, equities and all kinds of derivatives). “Wall Street gets the upside and society gets the downside” was the operating principle.

And what a downside that proved to be.

Henry M. Paulson Jr., Treasury Secretary at the time, said the Troubled Asset Relief Program, or TARP, was needed to buy those troubled assets from the banks. But this quickly proved unwieldy, so TARP pumped roughly half a trillion dollars into bank equity. The Federal Reserve backed this up with an enormous amount of liquidity through more than 21,000 transactions.

The additional government debt as a direct result of this finance-induced deep recession is estimated by the Congressional Budget Office at around 50 percent of gross domestic product, roughly $7 trillion.

These are staggering numbers. And this system of big banks taking outsize risks, failing and imposing huge damage on the rest of us has to stop. This ball is now firmly in the regulators’ court.

Whatever your broader issues with the Dodd-Frank Act of 2010, one point about legislative intent in this law is clear: The regulators have the authority to cut banks down to size and return them to their historical role of intermediary between savers and borrowers.

As for size, the regulators have long ignored the existing guidelines and allowed the biggest banks to get bigger. We need to go in the opposite direction, and that includes cutting down to size the private megabanks, as well as Fannie Mae and Freddie Mac. It also means taking advantage of the resolution authority and all associated provisions that Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation, worked so hard to put into the Dodd-Frank Act.

As Jon Huntsman is arguing on the Republican campaign trail, too-big-to-fail banks simply need to be forced to break themselves up.

But we also need to make the megabanks less likely to fail. The easiest way to do that would be to require banks to have enough common equity to absorb losses.

But the bankers have pushed back hard, with Jamie Dimon, head of JPMorgan Chase, leading the way with statements like this on capital requirements, which are known loosely as the Basel Accords: “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American.”

Dan Tarullo, responsible for this issue on the Federal Reserve Boardseems to support the idea of requiring significantly more equity in big banks, perhaps moving in the direction recommended by Anat Admati and her colleagues. But Mr. Tarullo appears to have lost that battle for now.

If we are not breaking up banks and if we are not requiring them to have reasonable levels of capital (thus limiting how much they can borrow relative to their equity), we must use all other available tools to stop the too-big-to-fail banks from taking excessive and ill-conceived risks.

This is where the Volcker Rule becomes so important. Named for Paul A. Volcker, former chairman of the Federal Reserve, and adopted as part of Dodd-Frank at the insistence of Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, the Volcker Rule directs the regulators to get banks out of the business of betting on the markets.

The regulators are now determining how they plan to carry it out. Draft proposals are currently open for comment.

But the latest news on this front is not encouraging, as crucial regulators seem stuck in a “bigger is better, and anything goes for the biggest” mind set.

The Volcker Rule has some good points, including a requirement that trader compensation not be tied to speculative risk-taking, and that firms collect and report some essential data to regulators. But the current draft does too little to actually stop the banks’ risky practices.

The main problem is that the rule as drawn does not set out the clear, bright lines that banks and regulators need, nor does it provide for meaningful enforcement. Instead of drawing the lines, the proposed rule mandates that firms write many of the rules themselves.

There is some good news. At this point, it is only a proposed rule, and the public is able to comment. Organizations like Better Markets that promote the public interest within the regulatory process will be in there fighting to strengthen the proposed rule and make the final rule better.

Everyone who cares about real financial reform should do the same, but the regulators’ draft rule has made it harder to uphold the public interest than should have been the case. For example, the regulators ignored the breadth of the Volcker statute and focused instead on only a narrow slice of the bank’s balance sheet – just what the bank says is for “trading” purposes. Much else of what big banks do seems likely to escape scrutiny.

The regulators also have given very little guidance on conflicts of interest, on what should be considered high-risk assets or on what high-risk trading strategies should be permitted.

During a Senate hearing last week, Senator Bob Corker, Republican of Tennessee, focused on another important problem – the lack of any restrictions on trading in the enormous Treasury securities market. The regulators will create a lot more paperwork for the banks, but if the current draft is adopted, the too-big-to-fail banks are not likely to be forced to stop doing much.

Last year Senator Levin said:

We hope that our regulators have learned with Congress that tearing down regulatory walls without erecting new ones undermines our financial stability and threatens our economic growth. We have legislated to the best of our ability. It is now up to our regulators to fully and faithfully implement these strong provisions.

From what we’ve seen so far, our regulators have not yet understood this message. They seem instead more in tune with Mr. Dimon, who insisted this year that regulators should back away from any effective implementation of the Volcker Rule:

The United States has the best, deepest, widest, most transparent capital markets in the world, which give you, the investor, the ability to buy and sell large amounts at very cheap prices. I wish Paul Volcker understood that.

Mr. Dimon — who is on the board of the Federal Reserve Bank of New York — seems to have forgotten the financial crisis, its impact on ordinary Americans and the utter fiscal disaster that ensued. Or perhaps he never noticed.