Submitted by ssbaker305@yahoo.com, Sep 25, 2008 12:48

Oh, the New York Sun is so charmingly quaint! Some banks may go under, "Interest rates may go up for certain loans in the short term, but that's just letting the markets rather than the government set a price on capital." The Sun obviously thinks we still have banks in the mold of Jimmy Stewart in "It's a Wonderful Life." The editorial completely fails to address the results of rampant - even rabid - deregulation, such as the $180 TRILLION derivatives market. If even 10% of this goes bad, it'll make Paulson's $700 billion look like change under the couch cushions. The FDIC cannot insure against a tsunami of bank failures - it is already undercapitalized just from IndyMac and other smaller banks that have recently collapsed. You will see a run on the banks that'll make the 1930s run look like people just dropping by to say 'hello.' Forget about your investments in brokerage accounts if the brokers start to fail; the equivilent of the FDIS, the SIPC, is absurdedly underfunded, doesn't even pretend to cover accounts greater than $500,000, and based on $150 membership fees to brokers (not a misprint) couldn't insure against the loss of a typical firm's postage stamps, let alone their clients' money. Congress - belatedly - seems to finally get this. That is why - despite misinformed 'bailout' talk when the money will really be used to buy American assets at distressed prices, and maybe to profit eventually - they are probably going to pass some version of the Paulson plan. The market is already reacting positively - the stock market, that is; the credit markets remain frozen. The plan may not work. $700 billion, as I already said, is too little to stem the flood. There is the nuclear option then: The president will have to assume FDR-like powers to solve the derivative collapse. He should declare all derivatives placed outside of legally regulated markets (90% of them) null and void. These "bets" - worth $180 trillion according the U.S. Office of the Comptroller of the Currency in America alone, and up to $450 trillion worldwide - could not have been made in regulated markets, because the players had insufficient collateral. If the parties object to the elimination of their derivative bets, they should be reminded of the penalty for fraud; it is inconceivable they did not know they were establishing positions far beyond their ability to repay. For every buyer there is a seller, so the amounts lost would zero out and no party would gain an advantage. We would just get to reset the clock. This is as fair as things can be made, given where we are. What is causing the panic in the markets right now is the realization that the losers have insufficient money to pay the winners. The domino effect of multiple collapses cannot be stemmed by any government, even by running the printing press overtime. The only solution is to wipe the underlying derivatives off the books and ensure these bets are never made again by creating laws to send those who make them in the future to jail.

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