With Health Care now out of the way, we can get to what I consider to be the more important issue: Reforming Wall Street and the banking sector.

As I noted 6 months ago, the White House emphasis on Health Care over Finance was a significant tactical error. I would imagine with their weekend health care victory, the White House might push for finance reform. I expect they will see some significant traction.

I do not know what the political fall out from being for or against health care will be. But I can tell you that it will be much harder to oppose re-regulating banking. While the banks have succeeded in buying Congress, I think their attempts to stop a major overhaul of financial regulation will be far more difficult. Political opponents will paint anti-reformers as pro-banks and anti-family.

Ideally, what should that overhaul look like? I can identify at least six areas that need total overhaul:

1. The Ratings Agencies: The prime enablers of the crisis, their pay-for-play business model is a debacle. Their status as Nationally Recognized Statistical Rating Organization (NRSRO) should be stripped, and the space opened up for real competition.

2. Derivatives Must Be Regulated like all Financial Products: Put derivatives on exchanges; require counter-party disclosure and transparent open interest reporting. Capital requirements for trading is needed — and like other insurance products, there should be reserves for losses; Lastly, we should repeal the CFMA.

3. Regulate Non Banks lenders like Banks:  The unregulated non-bank lenders were at the heart of this crisis. It doesn’t matter if you aren’t a depository institution, if you loan money, you must be regulated like any other bank PERIOD.

4. Reinstate Net Cap Leverage Rules:  Over turn the SEC Bear Stearns exemption via Congress. Reinstate the former 12-to-1 leverage rules.

5. Eliminate Too Big To Fail:  Nixon Treasury Secretary George Shultz famously said “If they are too big to fail, make them smaller.”  Put caps on percentage of total US assets allowed. I suggest 1%. Break up insolvent, incompetent megabanks — like Citi and Bank of America. And I would carve up JPM as well. Separate the Depository Banks from the investing houses. (restoring Glass-Steagall will do that).

6. Do not give the Federal Reserve MORE Authority:  The Fed should focus on monetary policy. They can work closely with whoever is ultimately the bank regulator — but I do not believe having them be be the prime over seer of banks can work.

7. Stop Regulatory Forum Shopping:  The alphabet soup of various bank regulators OTS, FDIC, OCC, etc. should be replaced with one regulator. The FDIC is the only office that did a good job this entire crisis, put all regulatory responsibility under Sheila Bair’s office.

8. Overhaul the SEC:  They need to have numerous improvements: Start by making them less of a law firm and more of a finance shop. Expand the hotline/whistleblower division, offer bounties for discovering and reporting fraud. Add a quantitative division to look for issues mathematically.

9. Reform Compensation:  The system of privatized gains, socialized losses must be thwarted. Exec compensation is totally disconnected from their performance. Major overhaul from shareholders is needed. Require custodians — Mutual funds, pension plans, etc. — to vote their holdings (shares) as a fiduciary.


Essentially, I am advocating a “Do Over.” Reverse the past 3 decades of radical deregulation. The alternative is an even bigger financial crisis, and sooner than you imagine.

The next time around, I plan on watching it all unfold from St. Barts . . .

Category: Bailouts, Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

53 Responses to “And Now, On to Financial Reform . . .”

  1. phb says:

    Better buy your tickets then, financial reform is not happening as long as it is acceptable to add special purpose addendums to bills. Banana Republic in full display today. (too cynical?)

  2. torrie-amos says:

    imho, i agree it was a tactical error, yet, it is very possible they are better at this political thing than us, lol

    a. perhaps they see it as, if they win, repubs have shot there wad, and are in-effective mouth pieces in the debate

    b. u can now go to banks and say, look and see how we did health care, u better get real real real quick or we will jam xyz down ur throat

    c.with banks more of an emotional issue for all, wouldn’t it be special if they let things lie for a month and then put on a big show for may-oct. passing a big bill right before elections

    makes u wonder, they might be pretty good, it’s how i would paly it now

  3. radix023 says:

    I don’t believe banking reform is next. They’re going to hand out citizenship to the illegal aliens so they can get re-elected.

  4. Forbes says:


    And Now, On to Immigration Reform . . .

    And Then, On to Energy Reform . . .

  5. Moss says:

    The Dems ran on Health care reform so not sure it was a tactical error. If it failed then yes but the meltdown did not occur until well into the campaign. Either way it looks like the stars are lining up for Financial reform and with the banksters having recovered from their near collapse the gloves may come off. I think the toughest thing u recommend will be number 6.

  6. flipspiceland says:

    The country is ungovernable. Period. I don’t confuse ‘governance’ with totalitarian penalties for nonconformance and ramming legislation down our collective throats. The Federal Government as well as most other entities in the states, and counties are essentially the archenemy of the people with willing voters signing their own death warrants.

    It is Too big to fail, and must be disassmbled, just like financial reform, mega banks, and any other entity
    that become elephantine, stumbline from one disaster after another of its own creation.

    No one body can efficiently run a territory the size of the disUnited States. It is in this utter chaos that so much corruption, flawed legislation, bribery, blackmail, and other crimes too numerous to mention can flourish.

    We need a national do-over, not just ill-conceived health insurance, and financial do-overs and he likelihood of that happening is no greater than finding chickens with lips.

    BonVoyage! to those who have decided to leave the disUnited States for they are the vanguard of evolution. Smart, courageous, and taking risky chances not unlike later pioneers that moved the frontier West.

    There are and are going to be far better places to live and thrive than in this ever-left-leaning Union of Soviet States our citizens seem to want.

    We have been sold out by our financial Tribes, who seem to already sense the decline and fall of this country, sold out by politicians who are all sociopaths who have been bought by wealthy interests and our children sold out by their own parents.

    Stay and muddle thru, in true socialist republic style, as the countyr turns ever more grey, or leave and strike out for new frontiers if you dare. There will be no other choice.

  7. b_thunder says:

    My 2 cents:

    cent #1: *real* reform is urgently needed;
    cent #2: using the health “reform” as an example, if our elective representatives even decide to reform financial services industry, they’ll make it worse. just like they’ve delivered 30+ million new customers to the industry, without removing any material inefficiencies or materially reducing existing cost, whatever they may do regarding Wall St. in my opinion will a) give more oversight authority to those who do not deserve to have any, b) will leave loopholes massive enough to squeeze the new GS building through them, c) the reform will be in large part written by The Street lobby and GS alumni in the US Treasury, d) as long as Jamie D. is on the board of NY Fed (which, coincidentally or not supposed to be JPM’s “regulator”) JPM will not broken up :)

  8. dead hobo says:

    I’m expecting a long bill that only stops the few losers and scapegoats who couldn’t get out of the way of the legislation. Loopholes galore will allow the worst of the current environment to continue. But since nobody in Washington will dare admit failure, the end result will be lots more of the same, only packaged a little differently.

  9. super_trooper says:

    @BR, why not formulate a letter that the readers could use or slightly modify to send to their members of congress. You can sit on the sideline and let lobbyists shove a bill down our throught or use the few tools available to the citizens

  10. clawback says:

    b_thunder has it right. Fake reform in health care augers bad for financial markets reform.

    Personally, I’ve already told my congressman that I’ll do whatever I can to not comply with any new insurance purchase mandates. I also told him that he has no authority to do this.

    Others are doing or have done the same. I make no prediction about what will happen (likely nothing), but people are not going to just sit by and “take it.”

    In other words, “Health Care Reform” (so called) isn’t even remotely “over.” The idea that we’ll quickly see congress move to end fraud, abuse and insufficient capital ratios is premature. I expect more hoopla of the Tea-Party variety before the MSM starts talking banks.

  11. Yossarian says:

    Kudos Barry for #9 but I think you should move it up on the list. It hasn’t been mentioned enough but the buy-side is as much to blame in this process as the sell-side (it takes two to tango). The fact that institutions managing multi-billion $$$ were entirely dependent on the grade of the ratings agency cartel was a major problem. The fact is, an overwhelming portion of our institutional money is managed by a politician or politically appointed bureaucrat or the corporate equivalent. In short, these people are using Other People’s Money and managing for their career risk more than for the financial interest of their clients. Somehow we need to strengthen the fiduciary relationship and better align the incentives of the managers with the interests of their clients (pensioners). It’s not a simple issue but very important.

  12. KentWillard says:

    Great list. How do we get it made into law?

    I think it needs to be refined to 3 key requirements (difficult, but that is all people can keep in their head). Then pound away repeatedly in mainstream media that reform must have those 3 elements, and not just window dressing.

  13. jjay says:

    Thanks to insane actions by the Federal government over the past 40 years this country is ruined.
    Putting aside the wasteful foreign wars for the moment, we have been mired in an economic Vietnam for those 40 years. A slow, grinding war of attrition, waged by the government against it’s own citizens.
    Complete with one crazy policy after another that equaled arc light, phoenix, agent orange in Vietnam for mass destruction. Free Trade, Open Borders, Offshoring, ZIRP, No Child Left Behind, TARP, on and on to bankruptcy and destitution. Mission accomplished, only 11% of the people think Congress is doing a good job, and Congress couldn’t care less and we have no one to replace them with. The uber rich will catch the last chopper out of here and leave the rest of us in an economic wasteland!

  14. bondjel says:

    Frank Rich agrees with you about the popularity of financial reform:


    Now let’s see if Obama will take advantage of this relatively obvious political fact.

  15. d4winds says:

    Excellent list–excellent. Might I add: “Repeal TBTF. Let ‘em fail. Let ‘em fail. Let ‘em fail. Let ‘em fail.”
    Politically, your list, though substantively excellent, is infeasible due to regulatory capture within not just de jure (albeit not de facto) regulatory bodies but Congress as well. Until I-banks are allowed to fail miserably, they will always have the rationale that business as usual is “prudent” as well as short-term profitable. The pre-condition for any enactment of these reforms is I-bank failure.

  16. catman says:

    Mainstream Republicans could get boxed in from both sides on this one. The liberal on the left and the really pissed off on the libertarian right. Bye bye mid term gains.

  17. dussasr says:

    Excellent list, BR.

    I’d like to add something on reforming the SEC. They need to be funded adequately to do their jobs. This could be accomplished by having all of their funding coming from small transaction fees from those transactions that they are overseeing. This way they would not be dependent on Congress to up their budget as their workload grows. It the workload increases they would automatically collect more revenue so they could increase their oversight.

  18. WFTA says:

    All great ideas. All should be done.
    Don’t know if they could have been when the banking lobby could merely bribe the politicians with campaign contributions and bling. Now they can spend, individually, unlimited dollars to defeat any senator or congressman or president that might offer to get in their way. I don’t like the odds.

  19. The Curmudgeon says:

    @flipspiceland: amen

    The chance for reforming the financial system has come and long since past. It came in the latter half of 2008 when all the “reform” that was needed was to allow the overextending ibanks and commercial banks to suffer the failure their mismanaged risk assuredly required.

    When the representatives of the people decreed that the financial system was so important until a cabal of banks could hold an entire nation hostage, “reform” forever and amen went out the window.

    Something will pass, but rest assured, just like the health care “reform” that passed over the will of the people after the Obama administration bribed and cajoled and imposed suicide on enough congressional votes to gain its passage, it will not reform anything. If nothing else, it will effectively enshrine the existing players as necessary to the republic, ensuring that the republic will fail with them the next time (like about now) the banksters overextend themselves.

  20. sparrowsfall says:

    “9. Reform Compensation: The system of privatized gains, socialized losses must be thwarted. Exec compensation is totally disconnected from their performance. Major overhaul from shareholders is needed. Require custodians — Mutual funds, pension plans, etc. — to vote their holdings (shares) as a fiduciary.”

    I’d say: make it illegal for executives to sit on their own boards. If they want that, let ‘em go private.

    My understanding is that most of Europe disallows CEO/Chairmen…

  21. constantnormal says:

    Nice list, BR.

    Y’know, you could do a George Carlin-esque simplification of that list and boil it down to … (drum roll)

    “properly regulate financial products and services sold to the public like a good and effective government should”

    Yeah — like THAT’ll ever happen …

  22. shalagarsamy says:

    Add on a tiny Tobin Tax and elimination of the carried interest rule while we are at it.

  23. rktbrkr says:

    If the FED maintains or expands it’s current regulatory role it means we haven’t learned a damn thing from our near financial death experience (and I think we haven’t!)

  24. rktbrkr says:

    How about full compliance with FOIL and an annual independent audit of the FED as a precondition for their regulatory power grab? “How can you expect us to operate effectively in an open and honest environment?”

  25. [...] Overhaul: As Barry Ritholtz notes, now that the health-care legislation is passed Congress can focus on financial reform. Simon [...]

  26. VennData says:

    How can the S&P be up (or not down sharply) if the GOP’s right that this “will fundamentally ruin the fabric of American society?” A little ole health insurance reform bill? That gets us to coverage levels achieved by the rest of the world? The same GOP media machine that told you a year ago that Obama was going to take away your guns? …socialize America? … ruin the economy with his stimulus?

    The GOP is a farce.

  27. Mannwich says:

    @Venn: I had actually resigned myself to not voting again for a while, but the GOP has motivated me to come out and vote AGAINST them just on principle alone in November. Heckuva a job, morons. I’m sure I’m not alone in this regard either.

  28. bm says:

    @ super_trooper says:

    “@BR, why not formulate a letter that the readers could use or slightly modify to send to their members of congress. You can sit on the sideline and let lobbyists shove a bill down our throught or use the few tools available to the citizens.”

    I second the motion.

  29. DL says:

    Marc Calabria (Cato Institute) has been on CNBC discussing the Dodd bill. Calabria insists that, despite assertions by Dodd to the contrary, the bill does not eliminate TBFT. What it does is provide various loopholes to permit it.

    I certainly haven’t read the bill, but Calabria’s analysis does make sense to me from a political perspective

  30. [...] Is financial reform next now that health care reform is in the books?  (Big Picture) [...]

  31. W T F says:

    Barry wrote: “Essentially, I am advocating a “Do Over.” Reverse the past 3 decades of radical deregulation. The alternative is an even bigger financial crisis, and sooner than you imagine.”

    I heard Senator Corker from TN this morning say that the financial reform bill needs more consensus, more middle of the road common sense.

    Can you believe this tool?

    The world just came within an eyelash of a complete and total financial meltdown. And all – all – of the contagions that lead to that meltdown originated in our financial markets: made in the USA indeed. This is beyond black swan (we all knew this could never happen), this is a zebra striped swan event. Has the global financial system ever come this close to a total collapse before? I don’t think so. And we know – for a fact – that it can happen again.

    And now we get to listen to Senators like Richard Shelby, Bob Corker, Jim Bunning (yep, he’s sits on Dodd’s committee), Judd Gregg, David Vittner (snicker), and Napoleon DeMint whine about the need for more compromise, about the need for more consensus, about the need for more bipartisanship.

    These people need to be called out on the table. The notetakers in the media have proven they are simply unwilling or unable to call them out. Given that, independent thinkers and doers in the financial community have to step up and start calling out these Republican fools.

    Starting over was a bad idea for health care. Starting over is looking like a pretty darn good idea for financial reform.

  32. DC says:

    All very logical and coherent, BR.

    Trouble is that logic and coherence don’t count for all that much vs. lobbyists and their minions (Shelby, Corker, Gregg, in concert with the Blue Dogs and other purchased/rented Dems).

    Watch for typical Rovian tactics from the right-wing apologists and grandstanders:

    * Reforms of any kind will kill small business and the recovery will stall.

    * Regulation should be always be left to the states. Except when the corporations have weaker lobbying teams at the state level, in which case regulation cannot be piecemeal.

    * Taxes are evil. Taxes will have little to do with financial reform, but it’s a sure bet that Republicans will find a way to heat up the wretched Tea Party saps who need to be spoon fed their thoughts.

    * Finally, some incredible link to terrorism. Liz Cheney will no doubt come up with a doozy.

  33. cognos says:

    BR – Based on this post I think you are well-prepared for a 30-yr career in the Senate. Talking alot. Making things sound complex and really important — but actually changing NOTHING.

    The key to better regulation — IS MUCH SIMPLER than anything you mentioned above. I think you should consider a FEW, very SIMPLE things that would have the most effect and help to FLEXIBLY manage future crisis.

    Consider that the KEY to the entire 2007-2009 crisis was simply asking for an extra 10% down on all mortgage. Nothing else. This would’ve solved most problems. (I would argue the Fed had the power to do this. So did OFHEO. So did the FDIC. — They just didnt want to). We dont need complex, rule-based regulations.

    The next crisis will be different. (Oh and btw — “derivatives” and ARMs didnt cause a single problem).

  34. jz says:

    Great list of points, Barry. They are logical and make sense, and that is why they will likely NEVER be passed by Congress. Maybe you should set up an intrade type exchange and offer odds on each of your points.

  35. hoosierboy says:

    Expecting anything different from our government in it’s current state?
    Ever hear of doing the same thing again and again, yet expecting different results?
    Yes, the definition of insanity…

  36. alfred e says:

    @cognos: What a great idea. But let’s up it to 20%.

    And then put the same capital requirement on all those jerks goosing the commodities markets.

    Works for me.

    Like the list a lot. All we really need is a go-back machine.

  37. donna says:

    I think it was probably a good idea to get health care done before pissing off the people with the money….

  38. donna says:

    And there is nothing fake about the reform. The fact that my kids are covered now til 27 reassures me a great deal. Perhaps those with no kids don’t get how important this bill really is for the next generation. No discrimination for previous conditions for those under 19? Huge. Coverage for a generation that as yet has zero job security? Huge.

    You just don’t get it, do you?

  39. alfred e says:

    Without hijacking this thread, let’s not get too excited about pre-existing HC conditions until we see the details.

    That was supposedly addressed years ago by Henry Hyde etal. Chest thumping bravado.

    All it required was a risk pool approach to insurance, which resulted in nothing affordable.

  40. GrafSchweik says:

    ” (Oh and btw — “derivatives” and ARMs didnt cause a single problem).”

    Your Cognitive Dissonance is not improving: still confusing ignition sources with fuels…

    “Gee, Sarge, it’s not the gasoline’s fault it exploded. It’s that low bid government stove the gasoline was stored next to!”

    Dude! There is No Such Thing as a spark-free environment…

  41. wngoju says:

    Agree with alphabet soup thing. However Shiela Bair is not the answer – She’ll be gone at some point. We need a government of laws, not of men. Er, men and women.

  42. [...] – Now that health-care reform has passed, it’s time for the reform ball to keep rolling and the White House to put an emphasis on reforming Wall Street and the banking sector, Barry Ritholtz notes. [...]

  43. JasRas says:

    First we have to work on establishing consensus that regulation is necessary. It is unbelievable, but some actually think less is more and that things worked out fine just recently… I think we found out with emphasis that those who are anti-regulation were the first to line up for “help” and “saving” when they realized how much they f*%#ed-up. Hmmm, a parent sees this as the “cake and eat it too” ploy– #7 on the list of things children pull over on parents.

    The role of government is to be the referee. No one wants a ref that calls too tight of a game, yet a ref that calls nothing unless blood is spilt isn’t really a referee. We need a referee. We need ref’s in several aspects of our country’s day to day life. The financial sector is one. Healthcare is another. Transportation is likely another as de-regulation has been a dismal failure for all except Southwest Air… Utilities is another. Education… Infrastructure… Safety/Defense….

    Capitalism is a wonderful thing. I love it. But part of capitalism is not in alignment with the areas listed above. He with the mostest wins? Profit maximization? No we need something else defining these areas. And someone else other than Wall Street. The last thirty years have been–”Wall Street is the answer” deregulate, price discovery, roll-ups, over builds, super size it. Do I need to go through a litany of screw ups caused by the sirens of Wall Street? If I do, you should probably crack some books and get caught up. Wall Street has been the “Hammer” in the toolbox. But it shouldn’t be the only tool used.

    We have a country that has been fraying at the edges for some time. We’ve slowly but surely created a chasm between the haves and have-nots that hasn’t been seen since notable European revolutions… The social acrimony runs the risk of making the disaster on Wall Street pale in comparison. Whether you are a Tea Party person, a populist, a Democrat, a Republican, the strong feelings are strongly against D.C. and the status quo…a message that still doesn’t seem to be getting through the Beltway.

    I have no answers. But I suspect it won’t be solved in blog threads.

  44. lalaland says:

    My only worries about making FDIC sole regulator is what happens when Mitch McConnell and his republican president appoint the head of FDIC and it’s ends up being run by a tool like Chris Cox or worse an ideologue like Holz-Eakins * cough – see: greenspan, alan – cough *or something? Then ideology really runs the whole cabal. At least with multiple regulators capture the flag is more challenging…

    @clawback: “Personally, I’ve already told my congressman that I’ll do whatever I can to not comply with any new insurance purchase mandates. I also told him that he has no authority to do this.”

    Maybe they should have just changed the law so people without insurance, and without the means to pay hospital bills, should simply be denied care and die? Is that your preferred alternative, or should taxpayers and charities keep sucking up the costs of treating people who don’t insure themselves for whatever reason?

    You could be healthy as a horse but if said horse kicks your uninsured head in who will pay for it? You? Any reasonable person with enough funds to cover facial reconstructive surgery pays for insurance instead – it’s much cheaper, so you are either too poor (which the bill helps with) or you believe someone else should pay your bills, and that would make you – and everyone who thinks like you – a mooch.

  45. [...] the full Senate will consider it. Here’s Barry Ritholtz’s analysis of what should be on the final bill. Comments [...]

  46. Jim67545 says:

    Within banking there are lots of unintended consequences. Allow tax exempt competition (such as Credit Unions or GSEs) to cherry pick lending products and the banks will do something else, with higher risk, such as CRE. Witness the wonderful results of the new credit card regs. Eliminate courtesy overdraft and get higher overdraft fees. Adjusting to the ever shifting “new normal.”

    BR did a WONDERFUL job covering most of the bases. Too bad he is outnumbered 200,000 to 1 by the lobbyists all arguing for the status quo, or their client’s particular advantage, filling campaign warchests, etc.

    On regulation, two points: 1. I recall the NY State Insurance commissioner bragging that the insurance part of AIG, which he regulated, was sound because of his agency’s oversight even though the derivative business was not. I guess if AIG had renamed insurance products as say, Widgets, they would have eluded regulation there too. I am tired of Fed, SEC and others saying that this or that was outside of their area of responsibility. Nobody saw anything unfolding because it was outside of their field of vision.

    2. To #7 add state banking regulators. With failures and consolidation the number of banks overseen by a State’s regulators have declined. Regulatory job insecurity is rife. So, there is an incentive to be “constructive” to the dwindling banks they regulate. One super regional recently arranged to be regulated by my state where it represents 1/3rd of regulatory agency’s budget. Did the agency promise a “better” regulatory environment? This is dangerous.

    The Obama admin’s idea for something akin to a base closing commission to find programs to cut is interesting. What the government needs is a dose of cancer – an agency created to find other agencies/programs to kill. Beautiful.

  47. [...] Barry Ritholtz offered up his prescription, which also relies less on councils and agencies and more on rules. He says six [...]

  48. [...] And now, on to financial reform… – Now that health care appears to be moving to the White House for approval, Congress has put a little more focus on financial reform.  I don’t know if this will stir the public interest as much as health care reform, but in light of the last few years, it should.  Barry Ritholtz gives his checklist for what financial reform should include.  It’s a good read. [...]

  49. Forbes says:

    as I posted yesterday

    this from AP today

    After health, Obama allies zero in on climate


  50. neutrinoman says:


    I agree mostly with your points about financial reform. Finance was never deregulated. But it was mal-regulated and subjected to crazy political pressures to (a) get everyone to own a house, and (b) “juice” the economy with cheap credit. Bankers making a lot of money in good times and getting rescued in bad is a sweet corollary (sweet for them).

    Real deregulation would have been, lifting restrictions and behavior AND removing implicit and explicit bailout guarantees. Instead, we’ve gotten Moral Hazard Central, where some restrictions on risky behavior have been lifted, some risky behavior was actually encouraged by the govt (viz., Fannie and Freddie’s subprime machine), and the major actors (but not the minor) are guaranteed when they get into trouble. I am not optimistic about removing these guarantees, distorting and destructive as they are.

    I agree completely about the FDIC. It’s the only regulatory agency that hasn’t been pulled into outside-of-mandate activities, which is why it’s done relatively well. The FDIC never caught the subprime fever. Every other regulatory agency is involved in too many things, with broad, fuzzy, and poorly-defined discretionary powers. All of our financial regulation needs to become much more rule-based, with far less discretion. That’s why I also agree about the Fed, which needs to do just monetary policy, and nothing else. The consumer-protection agency is silly and possibly dangerous (leading to more pressure for cheap credit to subpar borrowers). The right thing is safety-and-soundness regulation in terms of lending standards. It’s banks and lenders who need protection, first of all from themselves and the potential for “leading mania,” chasing yield and ignoring principal risk. Borrowers may need protection, but not this kind — after all, they are usually happy to borrow more.

    It’s inescapable that we need a rule-based money system: gold standard, money rule, Taylor rule, whatever. Repeated, ad hoc interventions by the Fed, starting in 1994 with the peso crisis, were the ratchets that got us here.

    Restoring Glass-Steagall will probably be impossible. It’s simply too disruptive, and few other countries have such a separation. Most large banks in the world are “universal.” Many countries don’t have depositor insurance. They accomplish the same thing in a better way with higher reserve requirements. These make the banks “self-insure,” so to speak. The best-run banks (like JPM and GS) do this voluntarily. Instead of keeping them from getting “too big,” make them less likely “to fail” with reserve minimums. Putting caps on bank size will also probably prove impossible to implement. Better to stop the Fed and FDIC policy of larger banks buying smaller, failing banks. That makes the bigger banks bigger, but also adds more losses to their balance sheets.

    Unfortunately, we’re unlikely go to get to financial reform on the momentum of health care “reform” (it’s not reform, but just more of the same, on a bigger scale, moving the govt faster toward bankruptcy). The political firestorm coming from the ramming through of this monstrous bill will consume the rest of this year and probably lead to large Democratic losses. One good result from this might be finally getting the Fannie-Freddie losses on the federal budget and maybe closing them up. They’ve destroyed the mortgage market. A normal mortgage market will come back when private mortgage originators no longer have to compete with government-backed entities that can take unlimited losses, AND when there’s no longer an enabling mechanism to sell off subprime mortgages.

    (Whenever I explain the subprime phenomenon to non-Americans, and how the government itself launched it, their jaws drop. It’s hard to remember a time, before 2001, when this entire phenomenon barely existed.)

    The only potential “reform” on tap right now is the pretty bad Dodd bill, which like the health care bill, is more of the same, institutionalized: “too big to fail” as a special category of banks and explicit bailout guarantees. Like the health care bill, it’s also absurdly long, and no one knows everything in it, or what its consequences will be.

  51. bronxboy57 says:

    Awesome list.

    Can we add to the list “Must adhere to fiduciary standard” if you give investment or financial planning advice? The exemption for wirehouses is arrant nonsense. I don’t want them to burn the house down again with their conflict-riden business model. Shame on us for not screaming loud enough to stop this insanity.

    If the democrats can get THAT done, then they deserve good fortune come election time. One can dream, can’t one?

  52. neutrinoman says:

    No one’s said it better:

    http://www.fool.com/investing/general/2010/03/23/alan-greenspan-on-the-financial-collapse.aspx (read Housel’s commentary)

    Too bad Alan didn’t say these in, say, 2005, but hey :)

  53. neutrinoman says:

    And read: http://www.fool.com/investing/general/2010/03/24/why-the-fed-will-fail.aspx

    I can’t stress enough the importance of abandoning this fuzzy system of “discretionary” regulation we have now and which the Dodd bill would make official law. Everything needs to be much more rules-based, simpler, and more transparent. Both the banks and the regulators, being human, love fuzzy, discretionary powers, because it makes them feel rich and powerful, sort of like cocaine. The Austrian school of economics got this (and much else) right. “Regime uncertainty” facilitates bubbles and other mischief and, on the down side, weakens confidence during slumps.

    In the old days, everyone knew the rules of stocks, bonds, CDs, and cash. Now, everybody’s creating exotic, customized financial products that no one (including their creators) can understand. Such products are also a perfect vehicle for taking large risks without seeming too — hence their large role in the subprime mortgage bubble.