Friday, October 03, 2008

financial crisis of 2008: campbell harvey: duke university

Campbell R. Harvey
Professor of Finance
The Fuqua School of Business, Duke University

His summary:

Over the past year, we have bounce from one problem to the next. It is time to develop a comprehensive and proactive set of policies. These policies will greatly reduce the chance of severe damage to the real economy and contribute to increased confidence in our financial institutions.

The proposed TARP (Troubled Asset Relief Program) is insufficient. We need a more comprehensive initiative that focuses on all key drivers of the real economy.

1. Treasury should not pay "hold to maturity" prices for troubled assets. The price should be set in between the fire-sale and hold to maturity. This insures a fair price for both the government and the financial institution. It reduces the cost of the program.

2. Establish a Bank Capitalization Fund (BCF) with the goal of purchasing amount equity of all viable financial institutions. This equity injection can be done quickly and will immediately impact the availability of loans.

3. Immediately fund the BCF investment fund with $200-$300 billion.

4. BCF should expire in 7 years.

5. Management of any government purchase of troubled assets should not be outsourced.

6. Recapitalize the FDIC both in anticipation of future failures and to instill confidence among depositors.

7. Immediately increase the FDIC maximum insured amount to $300,000 to reduce the chance of bank runs by large depositors.

8. Fed/Treasury needs to quickly put in place the staff to handle the potential of 750-1,000 bank failures.

9. Reestablish the Resolution Trust Corporation. This entity is mandated to dispose of assets of failed financial institutions.

10. Government incented principal resets of mortgages. Resets determined by banks and both have the option to recover some of the reset if the house price appreciates.

11. Two year moratorium on mortgage prepayment penalties.

12. Explicit quid pro quo for banks participating in TARP that credit should not be cut off from non-financial companies, particularly, small and medium sized companies that are the engine of growth and jobs in our economy.



Blogger Vicki Wild said...

Thank you for your simple, easy to understand expanation of what went wrong and how to fix it. It helps to understand the problem so I can make informed decisions.
PLEASE: Get this info on the local TV & radio news. So many of us are confused about this crisis. You are giving the info we need!

7:10 AM  

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