We are currently in the midst of the worst economic downturn since the Great Depression. While initial steps to deal with this unprecedented crisis have been taken, it is important to make sure we take the necessary follow- on actions to prevent this from happening again. There are three steps which must be taken to fix the economy:

First – Stop the Freefall.

President Obama’s Administration has taken necessary steps to halt the decline, although it will take some time, possibly as many as 18 months, for those actions to be effective. The use of TARP funds and the action of the Federal Reserve to stabilize the banking industry has been effective at unfreezing the credit markets.

Actions taken to stabilize the housing market, including tax credits for new homebuyers, support to FANNIE MAE and FREDDIE MAC, and other incentives, are showing signs of working. The housing market appears to have stabilized, although at a considerably lower level than a few years ago.

The American Recovery and Reinvestment Act, or the Stimulus, will create or preserve over 3.5 million jobs. This bill provides a tax cut to every working family. Infrastructure investments, in roads, buildings, transportation, and energy will provide benefits to our nation which will endure for years. However, many of the investments of this Act will require time to implement and work their way through the economy. Some of the benefits may take up to 18 months to be fully effective.

Together, the actions which have already been taken and those yet to come should halt the freefall, although it may take some time. Economic improvement will continue over the next year or more.

Second – Stop it from happening again

If we wish to ensure we do not experience another collapse, we must take action to make sure it does not happen again. We learned lessons from the Great Depression, and took action to sensibly regulate the financial markets. As time passed, we forgot those lessons, and removed some of the safeguards which prevented the fraud, corruption, and excess which caused the current crisis. To make sure it does not happen again, we must start by re-regulating the financial markets to the extent necessary.

Too big to fail means too big period. Capitalism requires competition. Anti-trust legislation exists to ensure that market share is not so concentrated that it prevents the effective operation of the market. When banks are labeled “too big to fail” it is a clear indication that the market share has become so concentrated the market cannot operate effectively. While the banking industry is currently still fragile, we should set a time limit, preferably about three years, after which firms identified as “too big to fail” would be required to divest themselves to permit efficient market competition.

We should restore the divisions between banks, brokerage firms, insurance companies and other financial institutions. Banks should be banks, not hedge funds. Hedge funds have their place in the financial markets, but they should not be backed by the FDIC. We should do this by restoring the Glass-Steagall Act through the repeal of the Gramm-Leach-Bliley Act of 1999. This would restore the division between traditional financial institutions, and allow each portion of our financial industry to operate effectively, without conflicts of interest. The divestiture required by restoring this common-sense regulation may solve the “too big to fail” issue also.

We should investigate how this crisis came about and prosecute crimes where they have occurred. Knowingly representing risky securities as safe securities is fraud, and should be prosecuted. Whether at the originating agency, where customers were encouraged to falsify applications which were then not checked, a practice known as making “liar’s loans”, or when these loans were purchased and repackaged without regard to the loan’s level of risk, it is probable that laws were broken. When high risk securities are repackaged, and sold as AAA rated securities, the credit rating agencies have failed to conduct their due diligence. Each step in the process is supposed to have checks and balances. Those checks and balances were over-ridden for the sake of maximizing profit. At each step, an investigation should take place to ensure that all existing regulations were followed, and that full disclosure took place as the resulting financial product was sold to the next link in the chain.

Third – Fix underlying problems

We must shift the focus of our economy from short term profits to long term investment. The current environment on Wall Street focuses on how a company will do this quarter. This attitude causes people to look the other way when problems are found, trying to pass the problem off to the future, or the next holder of the security. CEOs focus only on what the next set of numbers will bring is driven by the Boards of Directors. Stockholders only hold stock until the next “pop” then they sell off and move on to the next opportunity. The ultimate goal of a small company is to be bought out, not to grow to lead the industry. This focus on the short term comes at the expense of long term growth. The best solution to this problem is to change the tax treatment of short term gains. We should extend the definition of “short term gains” from one year to three years. Additionally, we should increase the taxation of short term gains to a rate higher than ordinary income. When the Bush era capital gains rate cuts expire in 2010, additional legislation should be introduced to change the definition and handling of short term capital gains as well.

We must address the Federal Deficit. Current levels of deficit spending are unsustainable. Continued deficit spending, beyond that needed as a temporary stimulus, will have an inflationary effect. This will require a multi-pronged approach, as it is a large problem with multiple causes. First we must fix health care. Much of projected growth in the Federal Deficit is driven by the skyrocketing cost of health care. With the combined cost of Medicaid, Medicare, Veterans health care, retiree health care, and the health care for current military and civilian employees, as well as the passed through costs from contractors and suppliers, health care costs are driving the increases in the Federal Budget. Fixing Health Care is an essential part of fixing the Federal Deficit. We must also address the corruption which exists in Washington today. War-time profiteering has run rampant. Story after story shows the corrupt link between lobbyists and earmarks, not targeted at accomplishing a legitimate government purpose. We must also reform the federal acquisition process. The current process for selecting and purchasing equipment and services is broken. It takes too long, an average of seven years to field new military equipment. It is not efficient, with multiple, duplicative, and complex processes which must be followed to compete for federal business. The process must be shortened, streamlined, and simplified to ensure that more businesses can have a realistic opportunity to compete. This increased competition will bring costs down. All of these steps must be taken to restore a balanced budget.

We must address the Trade Deficit. The current imbalance of importing more goods than we export is a cause of structural weakness in our economy. One of the largest segments of our imports are oil imports, and we must have an effective energy policy which will move us to energy independence within 10 years. We should start with a focus on conservation, with tax incentives and common-sense regulation. We should increase our investment in alternative energy research and development and infrastructure. We should also encourage the development of our traditional energy resources now, as we research how to transition to completely renewable sources for the future. By ending our dependence on foreign energy, we will drastically reduce the trade deficit. We must also ensure that we achieve fair trade agreements with our trading partners. Certain aspects of existing trade agreements are unworkable, and many of the provisions are not being enforced. Additionally, we will need to address currency manipulation, which is the cause of much of our trade imbalance with China.