7 keys to financial reform
Here is what you need to know about financial reform. If a bill in any way allows vast amounts taxpayer money to be poured into banks, then the bill does not end Too Big To Fail. Banks will assume this power will be used. Second, any bill that requires prescience by regulators and then the will to act on unpopular forecasts is doomed to fail. Keep that in mind as your read some key insights from the great Nicole Gelinas on fin reform:
1) The biggest financial crises arise from too much debt. Borrowers and lenders, ensconced in a bubble, fail to see the need for cash as a cushion against error. When the bubble bursts, it leaves behind so much debt that it bankrupts the financial industry.
2) Existing regulators should move toward consistency in their borrowing limits–requiring a financial institution to put a consistent level of cash down behind any debt security or derivative instrument, even if the government thinks the investment is perfectly safe, as it did with mortgage securities.
3) Further, existing regulators should wean financial companies off their reliance on the cheap overnight debt that they borrow from global markets to fund their investments. … Regulators could require firms to put down greater cash cushions proportionate to this borrowing.
4) These rules would encourage the most important regulation of all: market discipline. Individual companies would still fail to meet their obligations, but they would not bring down the entire financial system in the process.
5) Instead of adding to Dodd’s 1,336-page bill, Washington should repeal the 2000 law that forbids existing regulators to set consistent rules for all derivatives instruments.
6) Then, Washington should tweak the bankruptcy code so that, for example, financial firms can go bankrupt without giving their creditors the right to pull their derivatives contracts, destabilizing the financial world.
7) We need politicians and regulators to implement simple rules that don’t require faith in omniscient, micro-managerial government planning.
Me: I would also add that there is a great need for financial transparency by Wall Street so markets can better judge their creditworthiness.