The current U.S. financial meltdown is only one part of a three-way problem that also includes huge federal government debt and a massive foreign trade shortfall. The following offers a common sense framework for untangling this “briar patch”. It takes a little bit from here and a little bit from there when it comes to partisan ideologies.

It is the responsibility of government to cushion the blow for its citizens as much as possible while taking strategic action to ensure both a strong economy and healthy financial sector over the longer term, keeping in mind that there is a surge in competition for investment dollars in the global marketplace.

(1) Pass a negotiated version of the Treasury Secretary’s financial bailout package. It is essential that illiquid assets − the “unnatural” problem of subprime mortgages and associated collateralized debt instruments − be isolated from the rest of the system with as much dispatch as possible.

(2) The current President and the two contenders need to better explain to the public the implications of a failure to carry out step (1) on their wages and salaries, 401Ks, home prices and jobs. The current freezing of credit is crippling many businesses that require short-term borrowing to conduct day-to-day operations. It also needs to be explained that the bailout, if handled properly, may not result in any ultimate cost to the taxpayer.

(3) Explain that there is a “second wave” of defaults looming on the horizon, due to credit card, auto and student loans that is in danger of being made much worse by a failure to purge subprime mortgages. This “second wave” is a natural result of the business cycle and can be dealt with through traditional means (e.g., unemployment insurance) as long as significant progress is made in rectifying the “unnatural” problem.

(4) Impose a surtax on the nation’s wealthiest individuals. This was a practice adopted by many of Canada’s governments in the 1990s when public finances were out of control and it helped to restore balance.

(5) Cut back entitlements, slash “pork-barrel” spending and impose a freeze on absolutely non-essential areas of government expenditure.

(6) Do what it takes − for example, press on with new nuclear power facilities and offshore drilling − to move America away from dependence on foreign oil. Fancier solutions (e.g., hybrid and electric cars; wind, solar, geothermal power) will all evolve in the fullness of time anyway.

(7) Henceforward, the Federal Reserve should monitor and take action more aggressively when it comes to asset prices − also known as speculative bubbles in real estate, commodities, etc. − that are clearly out of alignment. Such action might not be popular, but it will be responsible.

(8) The Federal Reserve should have a policy of never allowing its key interest rate to fall to 1.00% again in a growing economy.

(9) Move derivatives from opaque “over-the-counter” trading to a formal exchange and require adequate capitalization by the firms engaging in such activities.

(10) Encourage an extra build-up of capital by financial institutions during the good times, as carried out (and made mandatory) by some other nations.

(11) Adjust capitalization requirements in light of the fact that “mark-to-market” accounting, versus historical cost, can cause a snowballing effect during an economic downturn. “Transparency” is a desirable objective but it also requires a more flexible approach under new oversight and regulatory regimes.

(12) Permit shareholder votes on executive compensation packages and golden parachutes.

(13) Shortly after November 4th, the new President should address the nation and make it quite clear that his first couple of years in office are going to hurt on the economic front. This recognizes the reality of an election campaign and the disinclination by the parties involved to be totally honest until the vote is counted.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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