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://en.wikipedia.org/wiki/Basel_ii

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

It’s interesting to note the timing of this work. Basel II guidelines were originally published in 2004? It makes one question how much of our current financial crisis had been foreseen.

I was tipped off to Basel II from Michael Lewis and David Einhorn’s great editorial in the New York Times, which had a few suggestions for repairing the US Financial system:

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

This editorial about “fixing the financial crisis” is a followup to their earlier editorial describing the problem:

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Great stuff! …but where does Basel II fit in? The timing truly is strange – what motivated its creation? How early were banks aware of the impending disaster?