How do we clean up this mess?

I think the government is on the right track this time, not like the Hoover administration, who ignored the crash of 1929, subsequently allowing the economy to worsen.

The government needs to address the following issues:


Liquidity in the financial sector
Loan workouts to stop the epidemic of foreclosures
Preventing economic activity from going into a tailspin
Regulation

The federal government has already addressed the issue of financial liquidity by committing a large amount of money to keep credit flowing. Tactics, how and where to apply the allocated money, is still being debated within the administration.. The original idea was to buy up "toxic" assets, those loans that are underwater and collateralized mortgage obligations both of which cannot be rationally valued. For this reason the treasury just recently backed away from using the bailout money to buy them. Instead it would rather lend the money to the banks along the lines of the AIG takeover. If the loans get paid back, which the financial institutions promise they will be, it could be quite profitable for the taxpayers.

One very big fly in the ointment is the community of financial executives who are clueless and uncaring about the inpending disaster and refuse to admit that they are a defeated nation, much like the germans at the end of world war I. They continue to dance while the ballroom is on fire. This attitude will make it difficult for the public to agree to corporate charity even though, this time, the public is in even greater danger than the corporations.

The other shoe is the attempt to stop foreclosures, which destroys neighborhoods in addition to destroying mortgagers credit..An investor with little equity will walk away from the house regardless of means. Anyone with sizeable equity in a house, investor or owner occupier, is not likely to do so, and, if in trouble, is a candidate for a workout. So is the "american dream" owner who will try to hang on to his house regardless of the economics. The major difficulty with workouts is that the mortgagees cannot be easily identified. The only way to workout this type of loan is to pay it back and negotiate a new loan.With enough money, the government can do this and eventually eliminate a large portion of toxic loans. Of course some mortgagers just don't have enough money and foreclosure is inevitable. But mortgages are like a juggling act. As long as they keep paying, the value of the collateral is immaterial.

How do we keep the balls in the air so that everything doesn't come crashing down? Keep the consumer spending, but with all the media induced panic you can't blame anyone for being cautious even if the economy suffers further.

I've got two suggestions for regulation of the financial markets.

Credit default swaps: Make it illegal to buy a CDS unless you own the underlying security, and make it illegal to write a CDS unless you are a state licensed insurance company or can prove adequate reserves to be able to absorb a hit.

Short sales: Institute a permanent ban on naked short sales.

None of this is going to halt the economic deterioration that has already begun. Despite the the gloating by the Europeans, and Sarkozy in particular, about how they brought down the american laissez-faire juggernaut at the G20 meeting on Saturday, they have no real solution to solving the current crisis.

They've locked the barn, but the horse is already stolen.