Although a bipartisan agreement will be hard to achieve in the current Washington environment, both parties should recognise that a package of entitlement reforms is less dangerous than an explosion of US interest rates in the coming years.

CONGRESS RAISED the federal debt limit this month by $1.9 trillion to a record level of $14.3 trillion. Given the projected budget deficit for the next year, the gross public debt of the US government will probably hit that $14.3 trillion limit by the end of 2010. This huge expansion of public debt is not just an abstract concern of economists; it is likely to hurt the practical situation of most American families and firms.

American subsidies are justified as necessary to promote home ownership in the US. Indeed, the rate of home ownership in the US rose to 68 per cent by 2006. Yet, without these governmental subsidies, the rate of home ownership in Canada also rose to 68 per cent in 2006. This comparison suggests that the large American subsidies for home purchases have led to higher home prices in the US rather than significant increases in the rate of US home ownership.

The administration could give the big banks a choice — replace your guaranteed debt with newly issued non-guaranteed bonds, or pay the US Treasury $6 billion representing the remaining value of this federal guarantee over the next two years. This would not be a punishment; it would be the fair thing to do for US taxpayers.

If Glass-Steagall were reinstated, we would be recreating the short-term funding weakness that forced Bear Stearns and Lehman Brothers into insolvency.

If the Treasury bails out large banks in the future, it should demand the same terms as those received by sophisticated institutional investors. Some of the rescued banks will become profitable, while others will become insolvent. Taxpayers need to maximize their gains on the successful turnarounds to compensate for their losses on the bailouts that inevitably fail.

By Robert Pozen. On Monday, President Barack Obama pressed 12 large US banks – all recipients of federal assistance – to increase their lending to businesses and consumers. In fact, during the third quarter of 2009, total loans at US banks fell by $210bn (€144bn, £129bn), or 3 per cent, the biggest quarterly decline since 1984.

In the latest crackdown, Kenneth Feinberg announced a $500K salary cap on executives at bailed-out firms. Robert Pozen on how the banks can clean house—and get the feds off their backs.

Funding a down payment with the credit increases the odds the buyer will default.

When an insolvent AIG paid out $165 million in executive bonuses, the public was outraged. But that is peanuts compared to the $62 billion AIG has quietly paid out to settle its obligations with some of the world’s largest banks. Last week, the details of this settlement were finally disclosed.