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The Federal Reserve should immediately lend to its member banks on an unsecured basis, rather than demanding collateral for its loans. Demanding collateral is both redundant and obstructive. It is redundant because member banks already can raise government insured deposits and issue government insured securities in unlimited quantities without pledging specific collateral to secure those borrowings.

In return, banks are subject to strict government regulation regarding what they can do with those insured funds they raise, and the government continuously examines and supervises all of its member banks for compliance. With the government already insuring bank deposits and making sure only solvent banks continue to function, the government is taking no additional risk by allowing the Federal Reserve to lend to its member banks on an unsecured basis.

With the Federal Reserve lending unsecured to its member bank liquidity would immediately be normalized and would no longer be a factor contributing to the current financial crisis or any future financial crisis.

The government should also remove the $250,000 cap on insured bank deposits, as well as remove regulations pertaining to bank liquidity, at the same time it allows the Federal Reserve to lend unsecured to member banks, as individual bank liquidity will no longer be an issue.

The Federal Reserve should lower the discount rate to the Fed funds rate (and, as above, remove the current collateral requirements). The notion of a ‘penalty’ rate is inapplicable with today’s non-convertible currency and floating exchange rate policy.

An interbank market serves no public purpose. It can be eliminated by having the Federal Reserve offer loans to member banks for up to 6 months, with the FOMC setting the term structure of rates at its regular meetings. This would also replace many of the various other lending facilities the FOMC has been experimenting with.

To address the current financial crisis I recommend the following:

• Declare an immediate ‘payroll tax holiday’ whereby the US Treasury makes all FICA Medicare, and other Federal payroll tax deductions for all employees and employers.
• Give the U.S. State an immediate, unrestricted $300 billion of revenue sharing on a per capita basis.
• Fund an $8 national service job for anyone willing and able to work, that includes child care, current Federal medical coverage, and all other standard benefits of Federal employees.
• Have the Treasury directly fund the debt of the FHLB and FNMA, the U. S. Federal housing agencies. This will serve to reduce their funding costs which will be entirely passed through to qualifying home buyers.
  
  There is no reason to give investors today’s excess funding costs currently paid by those Federal Housing agencies when the full faith and credit of the U.S. government is backing them.
• I would also have FNMA and the FHLB ‘originate and hold’ any mortgages they make, and thereby eliminate that portion of the secondary mortgage market. With Treasury funding, secondary markets do not serve public purpose.
• Penalties for mortgage fraud with Federal agencies should be increased and vigorously enforced.

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