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.

Okay – this isn’t really much of a stretch, since there have been food riots constantly for several years now… but you heard it here, folks. Tough economic times push those commodities speculators to bet on higher prices, even though petrol is at the lowest price in almost a decade.

RTFA: http://www.ft.com/cms/s/0/6f481fd2-06b6-11de-ab0f-…

Food commodity prices this year will remain above historical levels, hitting poor countries for the third year in a row, according to the US department of agriculture.

The forecast at the USDA’s annual conference in Washington points to lower prices than in the first half of last year, when the cost of commodities such as corn, wheat, soyabean and rice hit all-time highs.

Joseph Glauber, USDA chief economist, said the impact of the economic crisis on food consumption would depress agriculture commodity prices temporarily, but he warned that prices would remain well above average for the eight years since 2000.

Mr Glauber told the Financial Times that the outlook was “for a return to higher prices” as some of the pressures that drove last year’s increases and relatively strong growth in emerging markets “will return to play a major role” this year or in early 2010. “This is going to be again a tough year [for poor countries],” he said.

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.