I don’t have the expertise or time to fashion an alternative, so I am looking for real experts who wrote years ago about these problems we’re having now. Maybe people like Roubini, Calc Risk and others.
But I do not subscribe to all these “we know about moral hazard, but now is not the time for…” arguments. If I had to create an alternative, it would focus on getting the needed shifts in economic activity accomplished quickly.
Since we do need maybe 50% of the banking we have now, I would identify up front the survivors by ranking them from strongest to weakest in the event of a severe and broad drop in asset prices. Then I’d offer to make good on the pre-existing contracts of all of them in the event of insolvency, with a moderate haircut for the largest creditors (like credit default swap counterparties). A mechanism would have to be built in to stagger the wind-downs over a year or so, and enough money injected into the strongest 50% to keep them going afterwards.
House prices, stock prices, and the USD would come down over that year as it all sank in, or even quicker if people stopped believing the stock analysts. Fortunately, many still do!
Smarter people would have to add flesh and a few more bones o it, but that would be it. Get to the end-point in a year or so, without spending any more time and money on attempts to prolong the existing wasteful economic activities that are causing this crisis (i.e. over-consumption fueled by borrowing against overpriced assets.)
