The Great Deflation
We must address the clear and present threat to our economy.


The Solution
With our stagnant economy burdened by Washington’s failed responses to the Great Deflation, we must immediately commence rectifying these mistakes:

1. We must rein in government spending in a transparent and credible way. A good start would be to immediately convene the deficit-reduction committee appointed as part of the debt-ceiling deal, and ask them to quickly adopt a no-gimmicks, honest set of cost reductions that will restore investor confidence in the fiscal responsibility of the U.S. government. The members of this committee should rise above partisanship and perform their task as patriotic Americans in a time of crisis. This will inspire confidence and increase investment in the U.S. economy, which will spur job growth.

2. We must require our banks to immediately reduce their indebtedness — so they have the capital to resume lending to our small businesses — and without any more taxpayer money. If a bank cannot raise more equity capital by selling shares, then it must convert some of its non-depositor debt into equity — even if this causes bondholders and shareholders to suffer losses. Banks should be required to have 20 percent of their assets in the form of readily available capital (tier 1 capital, Basel III definition), 15 percent of it in the form of shareholder equity. Once the banks have achieved this goal, they will not only have sufficient non-debt capital to resume lending, but they will have a large equity cushion that will make taxpayer bailouts unnecessary in the future.

3. We need to resolve our mortgage crisis. Nearly 30 percent of homeowners have mortgages that exceed the value of their home. This is not necessarily their fault, as we have lived through the largest decline in home values in our history. Life savings have been wiped out. We need to take action to stop this devastation. When lenders foreclose on homes, they typically suffer losses that exceed 30 percent of the value of the home Therefore, we need a voluntary program to offer homeowners a deal whereby, in exchange for reducing their mortgage debt to a level equal to 90 percent of home value, they would commit to pay their lender half of any future sale or refinance proceeds they receive.

This should not cost the lenders anything, because they would save on foreclosure costs (through reduced foreclosures), and gain from future appreciation in the value of the homes. Fannie Mae and Freddie Mac, which currently own over half of home mortgages and are controlled by the federal government, should immediately make this offer to all their customers, and our bank regulators should adopt a rule assuring any bank that makes this offer to its mortgage borrowers that it will not suffer a reduction in the regulatory capital value of the mortgage. Any issues arising from implementing this proposal for mortgage-securities pools should be addressed so as to remove the obstacle. This plan will end the devastating foreclosure fever and stem the erosion of home values, once and for all.

4. We need to comprehensively combat Communist China’s predatory trade practices, including its currency manipulation, which unfairly enables its manufacturers to undercut our manufacturers and allows the PRC to accumulate savings that fuel debt in our financial system.

Once implemented, these urgent reforms will mark the beginning of the end of the Great Deflation; and the end of the beginning of restoring our prosperity and affirming American exceptionalism in the 21st century.

— U.S. Representative Thaddeus McCotter represents the 11th District of Michigan, and is seeking the Republican nomination for president. 


Sign up for free NRO e-mails today:

NRO Polls on LockerDome

Subscribe to National Review