Quick! Hide Your Wallet! More Bailout Bombs Waiting to Fall

No matter how you define the problem or espouse solutions, the market must be allowed to seek equilibrium.

This means that losses should be realized at the point of origination, the brokers,originators, banks, even S&L's and in the case of all these downstream investors, backtracking to the source.
Where losses cannot be realized or levied at the source, they must be realized in the hands of current holders, with capital markets deciding which to save and which to write off.

While difficult, not impossible. In the end, after losses are taken, government can then step in to either
nationalize (for later distribution/resale to the public), or re-capitalize the system with the kind of debt/equity that allows the taxpayers to be paid back and to include a nominal rate of return, which convertible securities could
offer, along with Convertible Preferred and equity investment allocations as strategically advisable.

(Let me note here that as part of this solution, I have recommended that these government investments be pooled into an Investment Trust as part of restructuring the Social Security system.)

All in all, after 40 years of investing in all kinds of markets, having been personally bankrupt, and starting new businesses thereafter, after working 80 hour weeks in startups, I have observed that the free marketplace can work, if allowed to.

Having said all that, I still allow for government intervention, because I see that as a way to avoid or minimize the depressing effects of a financial system out of control.

But, there is a trade-off. The role of government in free markets is to provide limited regulation and transparency, and assumes that investors can therefore adequately evaluate risk, and make appropriate decisions. If that is an adequate structure, then it stands to reason that artificially interfering, offering political idealism rather than transparency, is wrong.

Wrong for capitalism, wrong for Democracy, and wrong for out social construct. In all fairness, the punishment that must be enacted on the perpetrators of this mess is civil; the financial death sentence of losing their capital;
jail time where fraud is involved, and no slap either, real time, multiple years.Government must intervene only in the way that makes long term sense, as capitalists. And in this sense as well; government regulation of financial markets must provide for understanding that corrupt and greedy investors exist and will exist; new ones replacing old, looking for regulatory "holes," dishonestly seeking unjust enrichment at the expense of others.

Transparency must seek to limit any damage they can do. Such outcomes will never be totally avoided, but as the current situation more than adequately evidences, there are ways for markets to be free, yet transparent, and guided when necessary, not for social goals, or political goals, but for the safety of the markets themselves.
In the answers,must be ways to limit public losses to the invested capital of investors. That may mean that higher levels of capital are required as financial institutions increase size, and may also mean that leverage, through margin trading, through debt/equity ratio management, must be controlled.

There are free-market solutions yet to be used in controlling a financial system gone awry; we must get them in place to prevent the next "bubble."

Let's start with increasing Equity Capital required in each and every financial institution and "investment" instrument; limit leverage (the use of borrowed money to enhance Rates of Return-that's what mostly got us here in the first place), require financial transactions to be Exchange-traded of securities, or Registered if private transactions.
The freedom to invest carries the concurrent responsibility of assuming the risk of investing; forcing taxpayers to share in your investment strategy, against their will, is just wrong.

Right now, legislation in the Senate and House is pending to restructure the U.S. financial system. Many, many noted economic and financial strategists, regulators and yes, everyday Citizens (who don't agree with very much politicians do) can agree on some basics.
Allow banks to be banks, not Investment Banks. This means they are mission-limited to taking deposits, investing for the best possible Returns,commensurate with the risk of being responsible for safeguarding Depositor's money. How about the Mortgage business? Shouldn't that be at the top of the list? How about Small Business. Shouldn't that be at the top as well? Both of those "investment" categories, so vital to the financial health of the American economy, provide ample opportunities for profit at the hands of competent and creative managers.

Banks get a Charter, a license if you will, to try to make money for shareholders and note holders by accepting Deposits and shepherding them on behalf of Depositors. The risks that banks and other financial institutions take with shareholder's money is, and should be, a different level of risk than that taken with Depositor's money. All banks and financial institutions of any and all types should be limited in the leverage they can employ in any one investment category or class to the shareholder equity that supports the investment portfolio.

As institution size goes up, so should the required equity capital. Let's say up to five Billion in Deposits or investments, a ten percent minimum equity capital is required, and no more then ten percent of any investment category is allowed. Five to Ten Billion, eleven percent, ten to twenty-five Billion, twelve percent, twenty-five to fifty Billion 50 Billion-thirteen percent, fifty to one hundred Billion-fourteen percent, one hundred to two hundred Billion-fifteen percent, two hundred to five hundred Billion-20 percent, and finally, five hundred Billion and up, twenty-five percent.

Whoa! That 's a lot of Equity!

Well, yes, Virgina it is, and it's necessary to force the big, bad, greedy people to temper their enthusiasm for risk at our expense, and to encourage them to be smarter about designing investment products with high risk.
By limiting the risk-taking to what is reasonable and manageable, and by requiring high equity levels to support the enterprise, and limiting the amount of investment in any one category, we can be sure that the risks of losses are borne by the shareholders, who, it is hoped, will pay more attention to investment policies and management compensation programs that reward creativity and management skills, rather than the ability to gamble.

And, there are places to "gamble" and places for risk-oriented shareholders and investors to gather; Venture Capital, Hedge Funds and their brethren, where shareholders and investors exchange risk levels for higher rates of Return on Investment, knowing that that trade off subjects them to one percent risk of loss.

Other financial institutions like Insurance companies, Investment Banking companies and Stockbrokers? They too, must have equity capital to support their investment choices, either acquired through investment by shareholders, or though retentions of Earnings that can be used to support underwriting of policy expansion, or additional investing and lending in their portfolios.

Our financial institutions and the "bubble" risks have gotten out of kilter,and must be re-designed.
Increasing Equity Capital and limiting Risk is a sure way to allow the free marketplace to work, and consistent with avoiding risk to the primary investors in the U.S. economy-the Taxpayers.