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Clearly, any spe­cific assis­tance [to ail­ing finan­cial insti­tu­tions] will have to include penal­ties for those man­agers who have left their insti­tu­tions over­ex­posed. Central bank cred­i­bil­ity in enforc­ing these penal­ties will go a long way in lim­it­ing moral haz­ard. Raghuram Rajan in 2005, explain­ing how to pick up the pieces after the 2008 finan­cial col­lapse (via Paul Krugman)

The first half of the paper is about how invest­ment man­ager com­pen­sa­tion struc­tures work, and what sort of behav­iors they end up incen­tiviz­ing. After that it’s the con­se­quences (i.e. our present-day eco­nomic cri­sis) and what to do about it. Fortunately for us, the cooler and wiser heads pre­vailed, and we were able to sim­ply hand those same man­agers an addi­tional $500bn with no strings attached — which they promptly added to their cap­i­tal reserves rather than lend­ing out like it was tac­itly believed they would.

Cooler and wiser heads like present-day Obama economic-council direc­tor Larry Summers, who said (appar­ently between his pub­lic insult­ing of women in sci­ence and sup­port for glad­i­a­to­r­ial cap­i­tal­ism in Russia) that Rajan was “misguided.”

Obama is ask­ing for ideas, and while I have no faith that they will go any­where, I sent one in anyways.

Namely, I’d like to see a sov­er­eign wealth fund ulti­mately respon­si­ble to the Treasury, under advise­ment of Commerce and Labor. The man­date for the orga­ni­za­tion would include:

1. Ensuring restored mar­ket liq­uid­ity by sheer force of grav­ity (if pos­si­ble), or via the right of the stock­holder (as necessary).
2. Providing ven­ture cap­i­tal to entre­pre­neurs, par­tic­u­larly in carbon-negative (e.g. clean energy, pub­lic tran­sit, etc.), eco­log­i­cally renew­ing (e.g. toxic waste cleanup/disposal, recy­cling, etc.), and high-tech (e.g. high-speed telecom­mu­ni­ca­tions) industries.
3. A lender of last resort for sta­ble com­pa­nies dur­ing dire times (e.g. right now).

I also had points about cre­at­ing a fed­eral credit rat­ing agency, but I think the end goal would be bet­ter served by requir­ing out­side audits of credit rat­ings. I also had a point in there about invest­ing in exist­ing busi­nesses who add jobs in the U.S., but I think you’re guar­an­teed to have pretty severe cor­rup­tion in such an invest­ments pro­gram, to the point that it under­cuts the prof­itabil­ity of the program.

It isn’t a par­tic­u­larly rad­i­cal idea, most resource-rich coun­tries already have SWFs, and Sarkosy was stump­ing for this in Beijing weeks ago. Further, it’s my under­stand­ing that much of this author­ity is already held by the U.S. gov­ern­ment today. The pri­mary change is reor­ga­niz­ing the dis­parate author­i­ties into some­thing resem­bling an invest­ment bank — with the tax­payer as share­holder and a man­date for profitability.

Oversight must be absolutely air­tight, per­haps a well-funded adver­sar­ial orga­ni­za­tion within the exec­u­tive branch (a joint oper­a­tion by Justice and the SEC which pro­vides their inves­ti­ga­tors with a petri dish of what non­sense to look for in the pri­vate sec­tor — per­haps they will then be able to keep up with changes in the mar­ket?) in addi­tion to the more tra­di­tional over­sight exer­cised by Congress.

I can­not stress enough that the suc­cess of such a pro­gram — rather than it’s devo­lu­tion into a cookie jar of far­ci­cal pro­por­tions—requires that there be as many peo­ple as pos­si­ble who’s feif­doms depend on root­ing out cor­rup­tion in such a program.