Richard Whalen

“As home prices fall and banks tighten lending standards, people with good or prime credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace,” reports The New York Times. Foreigners who are holding dollars and who read this bearish report may wish to sell their greenbacks. We ought to buy them cheap say my economist and trader friends in Wall Street.

With the revalued dollar becoming a seeming toilet-paper currency, based on recent interviews, here are my modest proposals that would have extremely positive domestic and international effects:

• The House Republican caucus would request the nonpartisan Congressional Budget Office to analyze President Bush’s $3-trillion-plus FY 2009 budget in the light of the emerging recession’s anticipated decline in federal revenues and the automatic increase in contra cyclical “stabilizers” such as unemployment aid, as well as the $156 billion stimulus package adopted by Congress. Without remedial action, the FY 2009 deficit could be greater than Bush’s projection of $400 billion-plus that begins next October, more than double the 2007 deficit of $163 billion.
  
  A rising Federal deficit in a time of slump has long been the neo-Keynesian conventional wisdom. But this deficit could aggravate the simultaneous worsening credit squeeze and keep the economy flat on its back. The emerging 2009 federal borrowing requirement could “crowd out” creditworthy individuals and small and medium-sized businesses seeking bank credit.
  
  Here are a couple of assignments for the CBO. First, on the domestic side, estimate the Federal Borrowing Requirement for FY 2009 and the extent of such “crowding out,” and second, prepare a list of “non-essential” expenditure reductions to accommodate the estimated FY 2009 private sector bank borrowing requirement. The less the federal government borrows, the more the private sector can.
  
  
• On the international side, the CBO should update the Treasury’s holdings of foreign currencies held in the Exchange Stabilization Fund (ESF), and determine how much could be made available to the trading desk of the New York Federal Reserve Bank for short-term trading.

  As in the early days of the American Republic, the U.S. would announce a two-fold plan. First, the Treasury would issue U.S. notes and bonds denominated in foreign currencies, subject to a premium payable in dollars by the purchaser/creditor. Second, any foreign central bank with excess dollars may negotiate with the Treasury for swaps of selected foreign currencies, at a discount, for their redundant dollars.

  Instantly the word would spread throughout the interconnected world of money: New York is buying dollars – what do they know?

  We know that the dollar, beaten down by two terms of the Bush Administration, is ridiculously cheap. With my two-step plan, the U.S. could redeem dollars at a profit, reinforce our credit and restore our credibility ahead of the 2008 election. For example, the Bank of China, sitting uneasily on a trillion dollars in visible reserves, feels obliged to lecture the U.S. publicly on our profligacy. Suppose Beijing received a bid to buy say, $100 billion of those excess dollars for a negotiated amount of Yen or Euros, less a premium. Would Beijing bite? Perhaps Beijing might even like to sell us some Yuan!

  A strong actively traded dollar, backed by fiscal integrity and Yankee ingenuity is the first line of America’s defenses. Get busy, guys and hit those bids.