John Snow makes some sense

He writes:

The American economy is now threatened by two different but interrelated problems. The first is the declining value of housing, and the second is the seizing up of the credit markets. Together, they pose the risk of a serious economic downturn; some even predict recession.

Policy makers are now understandably reacting in the short term with steps aimed at blunting a spike in mortgage payments and calming credit markets. But beyond palliatives, we must come to grips with the underlying economic forces at play. The more quickly we deal with them, the shorter and less severe the eventual economic fallout will be.

I'm concerned that the pendulum has swung too far the other way, and that today even good credit risks are being frozen out. Credit markets simply are not working well, as evidenced by the widening spread between the London interbank offered rate and the fed-funds rate.

This choking off of credit poses the single biggest threat to the long economic expansion we have enjoyed. Addressing the problem needs to be a priority for policy makers -- and the challenge they face is to manage the political pressures to alleviate pain, while allowing the necessary market adjustment process to occur. Let me offer some suggestions.

First, while these adjustments occur, good monetary policy is critical to sustaining growth, maintaining employment levels and bolstering consumer and investor confidence.

Second, good fiscal policy needs to complement good monetary policy. In 2001-2003, we saw this occur as the U.S. economy faced strong headwinds. Rarely in postwar history has a fiscal policy response been as well-timed as those tax reductions.

Third, to do that, our financial sector, the real lifeblood of the economy, needs a good dose of "R and R." The first "R" involves a significant restructuring. Losses must get recognized, put on balance sheets and written down, as we saw at HSBC. Total write-downs are likely to be a multiple of what's been seen so far. Purging the bad assets is an essential step to restoring the credit markets.

The second "R" involves recapitalizing bank balance sheets to replace capital loses from restructuring. Lost capital must be replaced before we will get back to anything close to normal lending patterns.

Fourth, the credit situation indicates that we need a more coordinated and less fragmented approach to financial regulation. Today, no one regulator has a comprehensive view of credit market conditions and the stresses in financial markets. One strong national regulator with broad oversight of financial markets would put us in a much better position to avoid the kind of financial market turmoil we see today, and to respond to stress in the financial system when it arises.

Fifth, banks should be required to stay on the hook after making an asset-backed loan. While securitization has clearly been an important cost-saving financial innovation, an important source of discipline is lost when a loan originator simply sells off a loan to an unwitting investor without any continuing stake.

Sixth, the rating agencies' performance in assessing structured financial instruments clearly shows the need for greater oversight. To restore a sense of integrity, regulators need to examine the many conflicts of interest that exist in the current system.

With good policies in place, predictions of a recession need not become a self-fulfilling prophecy. By recognizing and adapting to inevitable and necessary market adjustments, such an unfortunate outcome can and should be avoided.

I agree more with the first three. The first three are "let's do more of what worked". The last three are "let's do more of what failed".