[Kylon]

In the earlier post I mentioned how you could increase transparency in the markets, reducing risk, and so increasing the influx of capital in the markets stabilizing the economy.

Well, unfortunately that requires Congress to pass a short term capital gains tax that would disproportionately hurt wheelers and dealers who make their money by manipulating the market. These individuals have significant funds, and thus significant political power which they can use to disrupt laws that may interfere with their pirating of the American Marketplace.

The Fed however has the capacity to react without passing laws. They can control the money supply, and specific loans and completely circumvent the Congressional process, which in this case could be a very good thing.


The solution to the problem ultimately amounts to the use of Fed using it's power to bully lesser banks into providing greater security.

It can't prohibit the banks from misallocation of resources, but there are things it can do.

1. It could in theory increase the required reserves in banks to contract the money supply overall, while specifically providing cheaper loans to banks that meet it's requirements.

The reserve ratio would effectively constrict the money supply in banks that don't comply, effectively killing their profits. However, banks that do comply with the Feds demands, getting a lower interest rate, which compensates for the lost money supply.

In order to ensure that banks that have the highest amount of reserves get the most money lent out to them at a cheaper rate, and thus the most profit, the new lending policy could take the amount of money in your bank into effect. Banks with more money relative to the amount they have taken out as a loan would be able to borrow more at the super discount rate. Banks that have less could only borrow up to, at the super discount rate to a certain amount relative to their reserves.

Banks that didn't play along would find themselves uncompetitive, with fewer profits, which would quickly translate into the ability to provide as high as interest rates for their depositors. This would result in their depositors with large savings accounts going to banks who did play along.


The policies could then be enacted to prevent banks from investing in overly risky investments such as options and derivatives, as well as increasing the transparency within the banking industry to prevent the loss of trust within the banking system, and thus hopefully prevent a system wide collapse.


The way to increase the transparency in the market is to create a seperate "Stock Market". One which all the traders on it have to abide by the new rules of a 75% Short Term Capital gains tax and a required period of over 1 year for a long term capital gains tax rate.

Those who didn't legally agree to this couldn't trade on this stock market.

Banks and other major financial institutions could be bullied into trading on this stock market, who in turn, due to their large number of assets, could draw all of the stocks into this new exchange from other stock markets.

Due to increased transparency, lower risk for investors vs. wheelers and dealers, banking institutions, and other major financial institutions interested in long term economic growth vs. quick returns, investors would migrate to this new stock market.

This in turn would put pressure on the New York Stock Exchange and other stock exchanges to change it's policies, in order to prevent stocks from going over to this new exchange, and to keep their influxes of capital.


What do you think of my idea for how the Fed could effectively increase faith in the markets again?

[setag]

Yes, you have the right idea. Very good indeed, however, there is more than one stock market, government, and bank. It is the global economy now and the US FED can't control it. That is what I think anyway.