It seems to me that the Financial sector has learned nothing from the recent Financial Crisis, and is already hard at work creating the next one, making sure that no pesky regulations are introduced that might avoid future massive tax payer funded bail outs. The Republicans and conservatives in other countries, under the mantra of no more bail outs, are making sure they will happen by opposing any government regulation of the sacred markets. The Republicans have also created a blame industry that targets the victims of predatory lending: the poor and the racial minorities, as if they or the government created the massive sub-prime market.
I have been reading what I think is the best book on the Financial Crisis I have so far read: Crisis Economics: a Crash Course in the Future of Finance by Nouriel Roubini and Stephen Mihm. Roubini is famous for having predicted the Financial Crisis in detail in 2006, though of course he could not perfectly predict the timing. I thought it would be interesting to create one of our Top Tens, this time on the Top Ten Tips for Avoiding the Next Financial Meltdown, loosely based on Roubini’s analysis,but using my word although using his headings, though it gives a Top Eleven! But really: read the book if this whets your appetite. This is Nouriel:
- Curing Compensation: To motivate finance sector managers, pay them in their own products with five year vesting period, so they have skin in the game. And find other ways to ensure that their compensation factors in risk and punishes excess risk taking
- Making Better Sausage My mother’s family were butchers and can tell you a thing or two about what goes into sausages in less reputable establishments. Similarly, financial products should be fully transparent and the risk of each element in its own right and in the event of the regular asset price bubble bursting factored into the description
- Reforming Ratings. The ratings agencies need new competitors and they need to be prevented from conflict of interest by making them earn their living working for investors not the producers of sausages.
- Dealing with Derivatives The whole derivative market needs to become a much more public, transparent exchange so all participants can see what margins are earned, risks taken, positions hedged much more publicly
- Basel Banking Regulations The regulations that govern banking world wide need strengthening regularly on the understanding that every regulation breeds the search to get round it
- Avoiding Arbitrage Measures to avoid institutions seeking the least regulatory state or environment by standardizing requirements across all jurisdictions and cutting off from any jurisdictions that fail to comply
- Enforcement and Co-ordination The regulation of the financial markets in the US needs consolidation to allow much better regulation
- Watching over the Watchers The Federal Reserve under Alan Greenspan catastrophically failed in its responsibility to watch over the build up of risk in the whole system. It needs its responsibilities in this area closely supervised by an appropriate watchdog
- Breaking Up Too Big to Fail Banks Any bank whose failure would threaten the overall system should be broken up
- Glass-Steagall on Steroids The 1933 Glass-Steagall Act should be reintroduced and separation of the different parts of the financial sector made even more stringent to keep retail banking, derivatives and other speculative activities separate and ‘make banking boring’ again
- Banishing Bubbles Central Banks need to take away the punch bowl just as the party is getting going, and needs closer supervision and specification of its responsibility to burst asset bubbles early and often
While the problems were systemic, there were two particular culprits in creating the systemic weaknesses and we should pillory them metaphorically appropriately:
And Republican Senator Phil Gramm