If we want corporate America to avoid short-termism, we need to help free portfolio managers and company executives from the tyranny of quarterly results.

Pozen proposes a different kind of principal reduction program instead of the current mortgage modification program.

Do you think that the limit on deposit insurance should go back again to $100,000?

The FDIC is bust. The group began 2009 with $30 billion in its insurance fund, but after covering losses at almost 100 insolvent banks so far this year, the fund is now in deficit and will stay in the red until at least 2012.

In 2008, Congress decided to “temporarily” increase the maximum amount of insurable deposits from $100,000 to $250,000 per account. Although the higher limit was set to expire at the end of 2009, Congress has extended it through the end of 2013 to “maintain confidence in the banking system” during the financial crisis. Proponents also argue that the increase is needed to keep pace with inflation, the $100,000 limit having been set in 1980.

These legislative actions were not necessary to protect small depositors — the main objective of deposit insurance. According to FDIC’s own statistics as of June, 2008, 98% of all depositors at FDIC-insured banks were covered by the $100,000 limit. Indeed, the average account balance of all deposits at FDIC-insured banks was $12,665.

The argument about inflation doesn’t bear close examination either. Although the consumer price index has risen roughly 150% since Congress set the insurance limit at $100,000 in 1980, on an inflation-adjusted basis, the initial FDIC limit of $5,000 on deposit insurance in 1934 should have risen to only $30,746 in 1980 and approximately $80,000 in 2008.

When the $250,000 limit was extended to 2013, the White House stated: “this will provide depository institutions with a more stable source of funding and enhanced ability to continue making credit available across the country.” However, there is no proven connection between higher FDIC insurance limits and increased lending by insured banks.

Look back at what happened after the 1980 change. S&L’s that were struggling to obtain funding to cover their liabilities spotted the opportunity to obtain that funding by attracting insured deposits. They offered high interest rates and employed brokers to canvass potential depositors. A few managed to solve their problems by doing this, but a great many more did not and imposed larger losses on the FDIC as a result. A similar pattern has been evident over the last year, as troubled banks have bid up interest rates to attract sufficient deposits to meet their pressing cash flow needs.

The people supplying this “hot” money that seeks out the highest short-term rates offered by weak banks are sophisticated investors who spread large sums among many FDIC-insured banks. By raising the maximum insurance limits from $100,000 to $250,000, Congress has more than doubled the amount they can deposit in the weakest FDIC-insured banks offering the highest interest rates.

What’s more, as a result of the increase in insurable limits to $250,000, regulators have lost the help of a savvy group of private monitors. When insured deposits were limited to $100,000 per account, corporations and wealthy individuals would look closely at the financial condition of a bank before making deposits over that limit. In turn, the executives of the bank would bolster its financial condition to attract monies from such sophisticated depositors.

With a $250,000 limit, however, many of those investors can keep most of their cash in insured deposits. In that case, they no longer have any incentive to scrutinize the financial condition of the bank; if it fails, they will be fully protected by the FDIC. In short, the new $250,000 limit will erode much of the private sector monitoring that could help federal regulators constrain excessive risk-taking by insured banks.

Unless we bring back the lower insurance limits for deposits, the FDIC’s rescue of failed banks could become very expensive. Taxpayers paid over $100 billion to resolve the S&L crisis, and Congress recently authorized the Treasury to lend the FDIC up to $500 billion.

Do you think that the limit on deposit insurance should go back again to $100,000?

Bob Pozen is a senior lecturer at Harvard Business School and the author of Too Big to Save? How to Fix the US Financial System (John Wiley, to be published on November 9, 2009)

The solution? Chinese consumers should spend more and US citizens should save more. Progress on meeting these objectives will be monitored by the International Monetary Fund, which will periodically issue a global scorecard.

While these are laudable objectives, they will be difficult to achieve. Consumer spending in China constitutes only 36% of its GDP, roughly half of the level in the US. At the same time, the personal savings rate in China is amazingly high — the average savings rate for urban Chinese households rose from 15.4% in 1995 to 22.4% in 2005.

And there are good structural reasons why Chinese households save so much and spend so little. First, China has nothing close to universal healthcare, despite its Communist ideology. So when a medical emergency arises, most Chinese families must pay large sums in cash to get treatment. To persuade Chinese families to consume more and save less, therefore, China must fully meet the healthcare needs of its citizens.

When China announced its initial stimulus package of $585 billion in late 2008, it was largely comprised of infrastructure spending and business incentives. During 2009, China did expand the stimulus package to include $120 billion to improve local healthcare. This is a step in the right direction, though not enough to solve the problem.

Second, if China wants its consumers to spend more and save less, it must substantially improve its Social Security system. China’s modern retirement system, begun in 1997, does not cover most workers in rural areas or in small urban enterprises. In addition, workers can no longer count on their children to support them in old age.

Most problematically, contributions to the current retirement system are made to provincial governments, which must pay out legacy benefits on pre-1997 pensions that were never funded. This is an unviable situation for provincial governments and Chinese workers. Instead, China’s national government should assume all obligations under the pre-1997 legacy pensions.

The challenges are equally daunting on the American side. The good news is that the personal savings rate of American households is rising: from negative 2% in 2005 to positive 6% during 2009. This means roughly $600 billion in incremental savings and reduced spending by consumers.

The bad news is that the US budget deficit is rising more quickly than our personal savings rate. In fiscal year 2008-2009, the US budget deficit will be $1.6 trillion. Over the next decade, the budget deficit is projected to average $1 trillion per year, according to the Brookings Institution.

Will Congress reverse these US budget deficits by letting the Bush tax cuts expire at the end of 2010? In theory, this could raise tax revenues by approximately $1.6 trillion over the next decade. However, only $700 to $800 billion of the Bush tax cuts went to wealthy Americans with annual incomes over $250,000; the other $800 to $900 billion went to middle and working class families. Maintaining low tax rates for these families will be strongly supported by both Democrats and Republicans, so the chances of Congress renewing the majority of the Bush cuts are high.

At the end of the day, the US budget deficits will fall and total US savings will rise only if Congress constrains the growth of public spending. This was done during the 1990s through a bipartisan measure called PAYGO — whereby public spending could not be increased unless it was paid for by other spending decreases and/or tax incentives. As a result of PAYGO and other factors, the US ran a budget surplus in 2000.

Congress could adopt a version of PAYGO to become effective once the economy rebounds (i.e., when GDP grew by at least 2% a year). In fact, the Obama Administration has proposed a form of PAYGO to constrain the growth in budget deficits. However, that proposal is filled with exemptions exceeding over $2 trillion — for Medicare payments to doctors, fixes to the alternative minimum tax and, of course, continuation of the Bush tax cuts for families with incomes below $250,000 per year.

In short, for the G-20 to succeed in correcting global imbalances and achieving sustainable growth, both China and the US would have to adopt bold measures involving significant financial and political issues. When the IMF begins to issue its reports, we will know whether either country has made substantial progress in achieving these worthy objectives. How likely do you think it is that they’ll get good report cards?

Bob Pozen is a senior lecturer at Harvard Business School and the author of Too Big to Save? How to Fix the US Financial System (November 2009)