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Stephen J. Dubner, NYT journalist and co-author of the book Freakonomics, asks the following question at the Freakonomics/Times blog:

“How Would You Simplify the Financial-Reform Bill?

The rules were simple: 5 suggestions, 500 words.

The other participants are Nassim Taleb, Justin Wolfers (Professor of Business and Public Policy at the University of Pennsylvania), and Raghuram Rajan (Professor of Finance at the University of Chicago, former Chief Economist at the IMF).

My answer began as follows:

“The lessons of this crisis are manifestly obvious: Three decades of “Radical Deregulation” freed banks to engage in all manner of reckless behavior. Leaving the status quo in place guarantees another crisis in the future. Historical patterns suggest the next calamity will dwarf the collapse of 2007-09.

How to fix it? Here are the first 5 ideas out of a longer list in Bailout Nation that not only would have prevented this past crisis, but would also prevent the next one:″

The rest of my answer — and Taleb, Wolfers and Rajan’s — are here . . .

Category: Bailout Nation, Bailouts, 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.

21 Responses to “Simplifying the Financial-Reform Bill”

  1. obsvr-1 says:

    The monster 2300+ page FinReg embodies the 1-5 from BR, although they have left the door open for allowing the banks to dabble (5%) in prop trading.

    The FinReg bill would be substantially smaller if they didn’t cut and paste much of the bankruptcy law/code into the bill for the TBTF resolution. Ending TBTF through the resolution process is looked at as a paper tiger as many believe that if Citi, BofA or the other big institutions were to fail the gov’t would step in to bail out instead of wind down (too bad).

    More should have been done in respect to executive and BOD accountability with defined compensation / bonus claw back and /or contingent liability tied to long term performance.

    ****
    Perhaps the masses should move their deposits from the Big 5 to local banks and institutions – still FDIC backed. How many people really do international business or travel such that they need an International bank. That would certainly send a message to the TBTF.

  2. NotQuiteSo says:

    Almost any *one* of these could have prevented the crisis – certainly any two.

  3. constantnormal says:

    Given that nearly ALL of the proposed “fixes” were opposed by lobbyists, who cast the deciding votes on what was to be included in the final legislation, it seems unlikely that any of these things will be introduced without an earth-shattering collapse of the American (and perhaps global) economy.

    Certainly Obama or any of the House or Senate “leadership” are not going to step up to the plate. They have had their way with reform, and look at what we got.

    After the next collapse, and the incumbents are ejected from office in the next election, then we might have a shot at some “change we can believe in”, but even then, it’s only a chance, as the slate is going to be packed with crazies, not with 21st century analogues to the Founding Fathers of this nation.

  4. Mr. Reality says:

    Barry, I wish Obama had you to run the Treasury.

  5. wally says:

    Taleb less wordy than BR? Amazing!

  6. IS_LM says:

    First, this obsession with the 2,300 pages is preposterous. For example, how many pages, in total, were the bills, starting with Jarn-St. Germaine and ended with CMFA, that deregulated the financial system? Does it even matter? I think not.

    Substantively, BR’s (1) through (3) are very important because (a) they’re actionable and (b) they’re actually included in the legislation (although somewhat disguised and subject to considerable regulatory interpretation). While I support bringing back Glass Steagall, the distinction between commercial and shadow banking is largely immaterial. As Wolfers says, if it borrows short and lends long, borrows liquid and lends illiquid, it’s a bank and should be regulated. I also think limitations on leverage and capital requirements, when combined with resolution authority and FDIC-like insurance funded by the industry, could be strong enough to deal with TBTF.

    Wolfer’s Tobin tax is a good idea to deal with negative externalities associated with a financial system rife with agency problems. Taleb’s statement has nothing actionable. Rajan’s list is based on his Fault Lines book (which I just finished; I’m going to read Bailout Nation next.) His ideas, frankly, have always struck me as a means to avoid addressing importance issues like derivatives and leverage. Given his Chicago colleagues laid the intellectual foundation for financial deregulation, I wouldn’t pay much attention to him. (The Squam Lake Report, an effort by John Cochrane to develop a modern regulatory structure, reads as if the last three years had not occurred.)

    Anyway, cheers to BR, who provided the only substantive posting at Economix on this subject!

  7. James says:

    Good stuff, Barry, good stuff. The only thing that would make me feel better would be a sixth suggestion whereby anyone who had a hand in the last debacle – and that’s a big crowd – served hard time as a big reminder for the next generation of up and coming “decision makers” in high places.

  8. Harry Lime says:

    The simplest regulation is “Don’t”. Don’t what? “Don’t do that”. Don’t do what? “Don’t [broad outline of prohibited activities]“. That way the burden is on person occupying the gray area to show that their actions are not prohibited. This is why the 53 page Glass Steagall Act was effective for 60 years. When it becomes complex and verbose, it is not regulation; it is an attempt to define what is or isn’t allowable in all circumstances. Good luck to that.

  9. AHodge says:

    nice and keepin it simple.
    my version? there are
    3 big drivers, the new “modern” financial flaws
    and 7 areas to fix
    I dont quarrel with your bailout nation list. and many of the items proposed. But the heart is deeper than dereg. This train wreck credit collapse came from modern financial developments.

    1 complex financial “product” and real bad accounting of it
    2 fake insurance (AKA insured by taxpayer),
    3 downside of securitization,

    As for the legislation, you could throw it out–or not.
    and get to work on

    • narrow banking–more than Glass Steagle,
    • rating agency do-over–massive
    • good accounting and risk management
    • Fannie, Freddie and FHA,
    • stable lending supply (the downside of securitization) encourage actual banks again with their credit depts?
    • stable funding (not $ trillions of subsidized overnight repo)
    • corporate governance, —including liability, compensation, shareholder rights and bankruptcy treatment of financial assets.

    On the last point, for now let’s just ask three questions.
    “When is eight figure termination severance for CEOs and top execs not a corrupt bargain?
    ““Why are industry execs who bankrupted their company while hugely enriching themselves still at large? Why are those who sold bad financial product still at large?” While corporations were founded over 200 years ago on the limited liability principle, committing the above in the past often resulted in fraud charges and jail time.

  10. In the updated version of Bailout Nation, I had a dozen or so suggestions (these are just 5).

    Regular readers have seen these over the years in various posts…

  11. willid3 says:

    i suspect the reason the bill was so big is simple. it had to be. otherwise there would be nothing but a lot of lawsuits over every term in it. some challenging all together, others just the terms in it. business has learned to do that.

  12. Andy T says:

    I think you could get it down to less the 20 words BR. Once again you’re attempting to create “better laws” and “better rules.”

    How about just enforce the laws on the books? Why not just enforce the Constitution?

    Taleb’s response was the best. Just let the shit hit the fan….

    It’s OK to be levered 40:1 or 100:1 or whatever you want to be levered. Someone gave you the credit to be levered that much….that “someone” should be on the hook when you blow up. Period. End of story.

    There is NO need to create new rules, or super-regulators, or anything else.

    Just enforce what is currently on the books and let firms fail.

    It’s really quite simple….

  13. Ilya says:

    Whoever the idiots were who surpassed ‘War And Peace’ using 3x the number of pages to create a con artist’s dream are the same common senseless morons who would put a plastic penny in place of a blown fuse and expect the lights to come back on…

    The fix is as simple as it ever was. “On january 1, 2011 we hereby un-repeal the Glass Steagal act. Anyone caught offsides will be shot.”

    Why belabour the unnecessary. A next step might be to reconsider interstate banking regs .

  14. “…No wonder, Reuters reported recently: “The American public wants to see bankers’ heads on spikes for triggering a global financial crisis, but so far prosecutors and regulators have come up empty.”

    The Rasmussen poll reports a growing disconnect between the political and economic elite and the public: The former say things are getting better while the public says their lives are getting worse.

    In addition to growing disappointment with the way the government is “handling” the economy, there is a sense that economic justice is disappearing with the people who caused the crisis still being rewarded and the rest of America loosing jobs, homes and hope.

    Curiously, this is NOT a story that most media outlets explore or follow up on. I made the film PLUNDER The Crime Of Our Time to investigate the crisis as crime story, not just a business problem. This is an argument made by many including Delaware Senator Ted Kauffman, former bank regulator Bill Black, billionaire investor Jim Chanos and others.

    We all wonder why there have been so few prosecutions and convictions of Wall Street higher ups.

    The while world blames the United States for plunging the world economy into crisis but executives here are able to maneuver around findings of pervasive fraud in real estate, sleazy practices of securitization and devious insurance policies by “settling” complaints written off as a cost of doing business and passed on to shareholders. Meanwhile we pass financial “reforms” that will take years to implement and are much softer than the rules in most other countries. Britain, for one, has made fighting financial fraud a priority.

    Corruption in our country is still seen more as personal transgressions, not institutional practices. Charlie Rangel’s apartments get more people upset than the trillions that have vanished in the crisis. Remember Bernie Madoff only went down after confessing to his crime. He was not jailed as a result of any enforcement investigation.

    The watchdogs have been asleep at the switch and so has most of the media which still treats this crisis as the result of faulty business decisions (by some of the “smartest people in the room.”) …”

    from: Danny Schechter made the DVD Plunder The Crime of our Time and wrote a companion book. ( http://www.Plunderthecrimeofourtime.com ) He spells out his views in a recent interview on OpEd News.( ) http://www.opednews.com/articles/3/Danny-Schechter-Dissects-W-by-Joan-Brunwasser-100813-154.html Comments to dissector@mediachannel.org
    http://globalresearch.ca/index.php?context=va&aid=20672
    ~~
    Andy T,

    remember if you don’t make it complicated, then you can’t spread the lie: “that’s it’s too complicated (for the masses), and they (the, saidsame, masses) should “leave it to the ‘Adults’”..

  15. Andy T says:

    MEH,

    Indeed.

    If some executives committed fraud in the SEC statements or wherever, then prosecute them. If some mortgage broker mis-represented shit in a loan agreement, then prosecute them. If Julio, the gardener in California, was speculating on home values and went bust, then so be it. He loses everything.

    If Bill Gross, the “bond king,” loses 30% because we finally let Fannie and Freddie go bust, then so be it. He should never have relied on that “government guarantee.”

    If the Pension funds also lose 30% on the same bet, then so be it. They need to be honest with their customers (the pensioners) and let them know that guaranteed 8% returns are NOT possible and that all the guarantees of their employment benefits were lies. Start saving some more.

    Financial reform was pretty easy after all….no need for new and better regulations….just get REAL.

  16. plantseeds says:

    “The FinReg bill would be substantially smaller if they didn’t cut and paste much of the bankruptcy law/code into the bill for the TBTF resolution.”

    i hate to be “that guy” but … not true. references to bankruptcy and bankruptcy code throughout, as is standard with any authorative literature, are identified only by the relative chapters and sections.

    e.g.
    (C) INSOLVENCY- The term `insolvent’ has the same meaning as in section 101(32) of the Bankruptcy Code.
    -or-
    (B) the covered financial company had been liquidated under chapter 7 of the Bankruptcy Code, or any similar provision of State insolvency law applicable to the covered financial company.
    -or-
    (B) in the case of any covered financial company or bridge financial company that is a commodity broker, apply the provisions of subchapter IV of chapter 7 the Bankruptcy Code, in respect of the distribution to any customer of all customer property and member property, as if such covered financial company or bridge financial company were a debtor for purposes of such subchapter.
    -or-
    (B) the terms `commodity broker’ and `stockbroker’ have the same meanings as in section 101 of the Bankruptcy Code.

    need i go on…there are frequent refernces throughout and 2 0r 3 instances of actual code text.. all in reference to swaps, segregation and bankruptcy treatment which amounts to several paragraphs of amended existing code text.

    this bible is a lobbyist and litigator’s dream come true..aspiring attorneys are surely carving niches.
    everyone wants a piece of this pie
    http://www.nytimes.com/2010/07/28/business/28lobby.html?pagewanted=1&ref=business

    BR points out the most important overlooked point when he said “but would also prevent the next one”.
    it’s great that this is bill going to protect us from the last crisis from happening (throat clear)….only it already happened.
    so what IS going to protect us from the next one?

  17. Per Kurowski says:

    They all completely ignored the fact that the introduction of capital requirements for banks based on ex-ante perceived risk, even though no financial crisis has ever occurred because of excessive investments in what is perceived ex-ante as having high risk, but all have always originated in excessive investments in what is perceived ex-ante as having no risk, introduced serious distortions in the financial system… and helped to cause the stampede after Potemkin AAA rates.

    Besides, only regulatory zealots could think that the risk for society of a bank defaulting is larger than the risk of the bank not doing what it is supposed to do.

    My simplification? Return to one single capital requirement for any type of bank asset, especially since the considerations for risk is already present in the risk premiums charged.

    The only thing the lower capital requirements for banks have brought about is increasing the size of the banks, not with muscles but with fat, too obese to fail, and allowing banks to earn much more on their capital when involved with those who should anyhow have gone to the capital markets.

  18. ella says:

    Re-institute Glass-Steagall Act of 1933. It was, I believe 100 pages long. At the same time, do not re-institute most of the subsequent amendments that gutted the act.

  19. AHodge says:

    two technical points
    the bill is said to have hundreds of pages on bankruptcy. Here is its condition for financial assets quoting professor Skeel

    “Congress has steadily expanded the exclusion of securities market operations from core bankruptcy protections serious unintended consequences. The application of the special derivatives provisions … raised even more questions…. most prominently in the Lehman bankruptcy.
    bankruptcy’s special protections for derivatives … I propose either…

    Remove the existing exemptions, imposing the stay in all cases, or…
    Stay only systemically important firms

    David A. Skeel Jr Bankruptcy Boundary Games. U. of Pennsylvania; European Corporate Governance Institute (ECGI)

    SO the umpty ump pages are the lobbyists keeping most the cap markets and derivatives special treatment. Meaning first in line, immediate liquidation with 100% recovery AT THEIR PRICES. This is version #19 of fake insurance special wall st treatment. then some of those same folks immediately turna round and scream about the turgid 1000 page bill of REGULATION!! oooohhhh

    im sure Prof Skeel could wipe out the accrued derivatives special treatment in 5 pages if he was asked to

    Glass steagle a good thing. But not good enough. It was half gutted before it was repealed. it will likely be unworkable (again) to define narrow banking by what it is not. The opponents know how to evade that

  20. cosmicthunder says:

    It’s utterly useless to provide alternate possibilities when the entire system is rigged to shut out the people on this board, and everyone else, no matter how thoughtful, effective, and successful the solutions are in favor of the moneyed class like Immelt, Lord Blankfein, Stephen Schwartzman, et al, who are financing lobbyists by the thousands buying up buxom lapdancers for the politicians evening entertainment, sending them on duck hunting junkets in the fall, and to ‘conventions’ during the best of the Spring skiing season in Vail, Aspen, and Snowmass, and Chamonix.

    It’s an exercise in abject futility.

  21. engineerd1 says:

    BR is not foolish. He is just a captive of his world view, and not quite self aware enough to know he’s caught: Though he spends lots of words explaining to others how THEY are so handicapped. De-regulation is NOT the cause….The cause is an unwillingness to let the consequences of risk play out. So one part of the govt plays the game that they tolerate a market as long as no one loses, and the other actually does believe in the market, and the two of them never coordinate their efforts, because govt is by its nature an ass. BR cannot perceive the truth because he has a pair of very dark glasses on. My hope is that someday they might slip and admit a little light. He is smart enough so it won’t take much more than a glimpse before he pulls the darn things off.