James Pethokoukis

Politics and policy from inside Washington

7 keys to financial reform

March 30, 2010

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.

Comments

They have got to get rid of proprietary trading and tax record wall street bonuses at rates north of 50% if the American public is going to buy into all of this ‘reform’

 

Eliminate Fannie and Freddie. Give Barney Frank the golden parachute he needs to retire to the gay S&M club of his choice. No expense too large here. Let bankers decide who’s credit worthy with the money they lend.

http://libertyatstake.blogspot.com/
[For a light hearted take on our present peril]

 

Insightful, beware the Global Carry Trade (GCT).

Posted by Gandhiolfini | Report as abusive
 

Financial re-regulation should be the next item on the agenda – no ifs, ands or buts about it, boys and girls. We had thirty years of deregulated “Reaganomics” and look where that got us. It is my wish that one day the American people overcome their dysfunctional love affair with Ronald Reagan and wake up to the reality that the Gipper was a complete and utter fool.

I was starting to get a little depressed about President Obama. I feared he was on the fast track to becoming another Bill Clinton. It now seems that he might want to be another Franklin Roosevelt. He may be FDR Lite, but I’ll take what I can get, thank you very much.

This administration will really get some steam behind it once the midterm elections are behind it. Count on a major upset for “the party of Lincoln” (TOO FUNNY!) in November The months between now and then will only see their continual implosion.

http://www.tomdegan.blogspot.com

Tom Degan

 

All this debate and no one really gets it. Stealing from one another has become an acceptable norm. How can I say this? The evidence is in how our society defines what it means to ‘steal’. Our lack of action to address the systemic thievery starting with the S&L crisis and moving through 3 decades is testimonial to our failure to punish white collar theft therefore we believe that white collar thievery is acceptable. Unless the perpetrator is armed with a deadly weapon our society cannot wrap its collective heads around what it means to steal from one another.

What is hilarious is by refusing to address these systemic white collar crimes we are in affect providing lunatic fringe radical groups to move away from theorizing about taking power into the realm of application demonstrated by arming themselves with deadly weapons.

Until we confront our inability to punish systemic white collar crime financial reform is meaningless.

It’s pathetic.

Posted by csodak | Report as abusive
 

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