Healing our Financial System

http://www.economist.com/node/18013965/comments#comment-814094

Herewith, my two cents on measures needed to heal our financial system.

tiger ticker wrote: Jan 27th 2011 11:27 GMT


It would be fun to set up a villain hierarchy somewhere and have people vote on it. My top villains would be:

  

(1) The human social need that impels "don't rock the boat" thinking: many people would have spoken out if they had known that the messenger would not get shot or ostracized;

  

(2) the common phenomenon that CEOs of financial companies do not know what is under their own roof; these naughty boys do not make it their business to find out because it would annoy the rainmakers; to borrow a Michael Lewisism, the BSDs and gunslingers will not submit to systems of control;

(3) capital allocation schemes in the US that stimulate risky behavior:  reckless banks get government-guaranteed deposits with insurance premia that are not at market rates, the too-big-too-fail doctrine which provides that LTCM or Goldman Sachs or Citibank or FNMA can do absolutely any risky thing with impunity;

  

(4) the harsh reality that regulators cannot keep up with the arcana invented by MIT graduates on Wall Street (eg, synthetic credit default swaps, off-balance sheet SPEs that disguise leverage, CDOs tranched out in 12-dimensional arrays, etc.) and

(5) campaign finance that permits legislators to get ridiculous amounts of money from those they regulate (Frank, Dodd, eg.)

My amateur-hour Rx:

• restore the wall (Glass Steagall) between commercial banks and investment banks;
• require FDIC-insured banks to pay deposit insurance premia that truly reflect their risk rating;
• require investment banks and auditing firms to be full recourse partnerships;
• deconsolidate (AT&T style) the banking industry;
• establish a legal limit on annual consumer debt service (debt amortized fully over 30 years) as a percent of income; and lastly,
• change all campaign financing to public taxpayer funding so that legislators will no longer be for sale.