Ben Stein, the highly questionable but occasionally correct pundit/jester has a few suggestions for the economic crisis. I post this because, for the most part, I tend to agree with him.

RTFA: http://www.nytimes.com/2009/03/08/business/08every…

REIN IN A RULE Immediately end the near-universal applicability of the accounting rule formally known as FAS 157. This is the “mark to market” rule that requires banks and other finance houses to value securities at current market prices, even when they may plan to hold those securities for some time.

The rule was intended to provide greater transparency. But its deficiencies are glaring. It allows short-sellers to basically price mortgage-backed bonds and to make them trade for pennies, even if the bonds are still meeting their payments. This “mark to market” price often does not come even close to the value of future cash flows that can reasonably be expected. The “mark to market” price is just the price at which the last short-seller made his sale.

This accounting rule kills banks and insurers, kills credit generally and makes taxpayers pay off the profits of short-sellers. It’s time to stop this giant gift to those sellers.

REVIVE A RULE End “naked short-selling” and bring back the “uptick” rule. The naked short-seller can sell shares without having borrowed the stock first. This is like tossing great white sharks into the kiddie end of the pool.

And then there’s the mystery of why the Securities and Exchange Commission ever ended the rule that requires an uptick in a share price before a short sale. The elimination of that restriction brings a major downside bias into prices.

Mary L. Schapiro, the new chairwoman of the S.E.C., should bring back the uptick rule. Yesterday wouldn’t be soon enough.

ADD A RULE Don’t allow speculators with no insurable interest to buy credit-default swaps on bonds.

RTFA: http://www.reuters.com/article/BANKSL/idUSN0725372…

Senators were outraged by the lack of details about where the bailout money has gone.

“That we find ourselves in this situation at all is … quite frankly, sickening,” said Senator Christopher Dodd, the Democrat who chairs the committee. “The lack of transparency and accountability in this process has been rather stunning.”

Eric Dinallo, superintendent of New York State’s Insurance Department, railed on Friday against AIG’s failed business model, likening its insuring credit-default swaps as gambling with somebody else’s money.

“It’s like taking insurance on your neighbor’s house and even maybe contributing to blowing it up,” he said at a panel sponsored by New York University’s Stern School of Business.

U.S. lawmakers have said they are running out of patience with regulators’ refusal to identify AIG’s counterparties.

On Thursday, Richard Shelby, the top Republican on the banking committee, said: “The Fed and Treasury can be secretive for a while but not forever.”

Agreed. What happened to Obama’s transparent government pledge and what is the point of hiding this information?

Browsing through John Taplin’s blog, I came across the following reference:

RTFA: http://www.nytimes.com/2009/01/25/business/25gret….

Mr. Raynes’s resolution is more radical: unwinding all outstanding credit-default swaps through a process he calls inversion.

Under this plan, insurance premiums would be refunded to buyers of credit protection from the entity that wrote the initial contract. And the seller would no longer be under any obligation to pay if a default occurred.

The premium repayments would be made over the same period and at the same rate that they were paid out. If a contract was struck three years ago and charged quarterly premiums, the premiums would then be refunded quarterly over the next three years.

Mr. Raynes’s proposal would treat hedgers – buyers who bought C.D.S.’s to protect themselves because they actually hold the underlying debt – differently from speculators who bought C.D.S.’s simply to bet against a troubled company.

Those guys, the gamblers, would receive only the premiums they paid to an insurer. Hedgers would have their premiums refunded, in addition to the difference between the underlying debt’s face value and an independent assessment of its intrinsic value.

For mortgage-related securities, this value would be ascertained by third-party analyses using loan servicing data on delinquencies, defaults and performing mortgages.

“If you stop the clock and reverse it, then the entire system will be able to breathe again,” Mr. Raynes said. “And over time, at the same speed that you got into the mess, you get out of it.”

Taplin has the following to say about it:

I like this idea because it unwinds a completely dangerous business that is used by speculators to launch their bear raids on banks using little or no collateral. Estimates are that half of the $30 trillion in CDS contracts would cancel each other out (offsetting bets). That still leaves $15 Trillion that no one has. Raynes idea of simply cancelling the contracts and returning the premiums is the only way out.

I’m not sure why this is the only way out, but there is a certain straightforward elegance to the proposal that really appeals to me. Essentially, the more that can be driven algorithmically, the less that can be short-sold by speculators. FTA, this all comes down to companies insuring debt-defaults for way less than they should have. After all, does it really matter if you can pay the claim later when you’ve gotten the money up front? In this case, the answer is no: plan B is the bailout.

RTFA: http://www.nytimes.com/2008/10/12/opinion/12doolin…

But we are suggesting neither that the human race would voluntarily turn power over to the machines nor that the machines would willfully seize power. What we do suggest is that the human race might easily permit itself to drift into a position of such dependence on the machines that it would have no practical choice but to accept all of the machines’ decisions. … Eventually a stage may be reached at which the decisions necessary to keep the system running will be so complex that human beings will be incapable of making them intelligently. At that stage the machines will be in effective control. People won’t be able to just turn the machines off, because they will be so dependent on them that turning them off would amount to suicide.

Brace yourself. It comes from the Unabomber’s manifesto.

Yes, Theodore Kaczinski was a homicidal psychopath and a paranoid kook, but he was also a bloodhound when it came to scenting all of the horrors technology holds in store for us. Hence his mission to kill technologists before machines commenced what he believed would be their inevitable reign of terror.

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We are living, we have long been told, in the Information Age. Yet now we are faced with the sickening suspicion that technology has run ahead of us. Man is a fire-stealing animal, and we can’t help building machines and machine intelligences, even if, from time to time, we use them not only to outsmart ourselves but to bring us right up to the doorstep of Doom.

We are still fearful, superstitious and all-too-human creatures. At times, we forget the magnitude of the havoc we can wreak by off-loading our minds onto super-intelligent machines, that is, until they run away from us, like mad sorcerers’ apprentices, and drag us up to the precipice for a look down into the abyss.

As the financial experts all over the world use machines to unwind Gordian knots of financial arrangements so complex that only machines can make – “derive” – and trade them, we have to wonder: Are we living in a bad sci-fi movie? Is the Matrix made of credit default swaps?

Food for thought. Although it’s painful to confront the root of this particular problem, I’m also getting wild kicks out of William Gibson’s Spook Country; it feels like science fiction but is set a few months in the recent past.

Where we live now – realtime – feels anachronistic.