What still needs to change as a result of the crisis?
- Francis LongstaffEliminate toxic government policies and incentives.
- Richard RollReduce the size of the public sector relative to the size of the private sector (in most countries).
- Phillip AndersonSubstantially better collection of the economic rent, worldwide, to stop it capitalizing into a tradable price. But like this will ever happen!!
- Fred HarrisonRe-structure the pricing mechanisms to eliminate the deadweight losses caused by taxation. This permits government to reduce income taxes, making it possible to re-employ marginal workers, re-launch capital formation and build confidence in sustainable growth.
- Yalman OnaranThe zombie banks that are being propped up by their governments need to die. The biggest banks need to be split up so there's no more too-big-to-fail going forward. There needs to be a serious debt restructuring of consumer, government and corporate debt so we can get out of the credit crunch.
- Johan LybeckThe perception that some banks worldwide are Too Big To Fail must be addressed much more forcibly than has been the case so far, either by much higher capital requirements than proposed under Basel III (20-25 per cent True Core Equity and CoCo bonds) or bank size must be limited both absolutely and in relation to the home country, or both.
- Peter TanousThe United States must adopt a credible solution to the rising deficit before it becomes unsustainable and that day is fast approaching. If interest rates were to return to the historical average rate that the treasury pays in interest (5.7%), we would be paying $800 million more annually than we are paying today and that represents 80% of personal income taxes today.
- Aaron BrownWe do. The arc of financial evolution is beyond our control, our job is to survive the ride, and that will require all kinds of change. We are living in the best of times, for all the dramatic uncertainties, and they will only get better. But we will not be able to enjoy them unless we go with the flow. The best preparation is to listen to a lot of Bob Dylan and ignore financial reports.
- Matthew LynnWhere do we start! One, Europe needs to bring an end to the euro – the most dysfunctional monetary system ever created. Second, we need to create a new global monetary system based on something other than the dollar. And finally, we need to get our debt – personal, corporate and government – down to manageable levels (by which I mean about 50% of GDP). That is going to be a long hard road.
- Jay W. RichardsThe federal government should slowly unwind itself from the mortgage and housing market, keeping manipulation of that market to a minimum, while strongly enforcing contract law. It should also institute legal restrictions on government, the Fed, and federal regulators, to prohibit a perpetuation of capricious too-big-to-fail actions, such as bailouts of private institutions and private deals negotiated by government actors.
- Michael Lim Mah-HuiNeed to regulate and down size the over-blown and over-rewarded financial sector and players and bring it back to serve, rather than to destabilize, the real economy. Need to address the growing inequality issue, in particular, the phenonema of wages falling behind labor productivity growth and the growing share of GDP accruing to capital and declining share to labor that lead to recycling of surplus savings of rich into risky/high yield financial assets (resulting in financial asset bubble) and into household loans (debt bubble) for majority whose income has stagnated.
- Les LeopoldWall Street must be re-shackled so that it becomes a much less profitable and much more boring place to work -- much as it was from the 1930s through the 1960s. Also, taxes on the super-rich much rise dramatically to reallocate the capital that fuels Wall Street gambling. A significant financial transaction tax also is needed to re-balance the economy. Money must be moved away from the financial sector and into the real economy. Re-instituting Glass Steagall and busting up the big banks would help as well. While we're at it, we should get rid of the carried interest tax break for investment partnerships and tightly regulate hedge funds.
- Robert LitanI am reasonably satisfied with Dodd-Frank as a broad outline, but we need clear and final rules relating to derivatives clearinghouses and their ownership. As a society, we also need to decide if and how to subsidize housing, and what to do with the GSEs. My inclination is to wind the GSEs down and provide means-tested, on budget, down-payment support for low to moderate income householders, recognizing that budgetary constraints may keep the size of those subsidies too small for many tastes. But one of the things we have learned from this crisis is that renting is not the bad social outcome it was previously thought to be – renting contributes to labor mobility, which can lead to lower unemployment rates and faster growth.
- Ann PettiforVast amounts of private household, corporate and financial sector debt needs to be paid down/written off/de-leveraged. Government should be ensuring that this de-leveraging takes place in an orderly way. Instead, the process is taking place chaotically…..Second, the private finance sector needs to be re-regulated. Banks may need to be nationalised if taxpayers are asked to carry the full burden of their losses. Third, capital mobility must be restrained if central banks are to regain control over the whole spectrum of interest rates – short and long, real, safe and risky. Low rates of interest are vital for the restoration of sound economic activity, and to enable entrepreneurs to remain profitable after borrowing to invest. “Tight” but “cheap” credit must be the future: that is credit for viable economic activities, not speculation, at low, sustainable rates of interest. In the meantime central banks and governments have to play a role in reviving economic activity in economies depressed by vast debts.
- Nye LavalleWe need to revamp the world financial system and take consumer money out of the too big to fail banks. We should go back to a more paper based society (rather than a digital society) where there are actual certificates and paper trails rather than digital accounting systems and spreadsheets that can be manipulated. Computerization should be used to help, not hinder and conceal.
- Consumer banking (home finance for most homeowners) should be exclusively handled by credit unions with no profit incentive.
- Community banks should be for small business.
- National banks should support big business and wealthy consumers.
- Investment banks (brokerage, etc.) should not be part of banks, and should focus on traditional financing roles.
- Insurance companies should be separate and distinct and regulated both nationally and in the respective states.
- Roddy BoydA separation of commercial and investment banks, a la Glass-Steagall above, is the first and most important order of business. Entities such as large banks that fund overnight via the Fed, or which accept consumer deposits, should not have more than a fraction--say 10%--of their earnings derived from capital markets. The corollary also holds true: It does not serve the U.S. public interest to have risk-oriented enterprises such as banks or mortgage companies (Countrywide, which had applied to be a primary-dealer in 2007 if memory serves, and Washington Mutual, which also had a large capital markets unit, are the primary examples here) able to fund or claim protection from commercial bank/Thrift holding companies. Secondly, the secondary market for residential mortgages needs to be rethought entirely. It is unclear that three years on either Freddie Mac or Fannie Mae can exist without direct government subsidy. It appears a run-off of these institutions needs to be considered, perhaps followed with an evolution to a German-style pfandbriefe securitized mortgage structure. Regardless, it is imperative that U.S. policy be to allow risk-taking from institutions with no exposure to the Federal Reserve or the U.S. consumer’s deposits. As such, their risk exposure is limited to a combination of equity capital and market willingness to extend short-term financing. Thus collapses such as Drexel Burnham Lambert in 1989, Enron in 2001 or Refco in 2005 are absorbed by the market.
- Clive BoddyChanges in financial laws, rules and regulations will have no effect if Corporate Psychopaths are still in positions of power and influence in corporate banks, as they will always find ways around the rules or ways to bend them to their own advantage. Anyone at senior director level in the corporate sector should be screened for psychopathy by a combination of other report psychopathy measures (where others report on your behavior) self-report psychopathy measures (where you report on your own behavior) and if necessary, brain scans. Their removal to positions of less influence and power will allow those with a conscience to take charge and this will decrease the greed involved and increase the humanitarian element. Governments also need to realize that in many cases the amount of money they have given banks to bail them out could have instead been given directly to individuals with mortgages to pay off their debts to the banks, thus solving the debt problem from the bottom up rather than trying to solve it from the top down. This would have re-capitalized the banks and therefore saved them, saved many people from homelessness, boosted consumer confidence, underpinned the housing market, and put money into the system where it would do most good (via the multiplier effect). This opportunity has not yet been lost as the massive "quantitative easing" is still taking place and that money could be best directed at those who need it most - those at the bottom of society rather than those at the top.
- Robert Rodriguez
One of the issues that has not been addressed is "Too Big Too Fail", which is why Europe is a mess. Their banking system is far more concentrated than the US and thus is more aligned or attached with their central government. The money from the ECB is being funneled into the banks and the banks are buying the sovereign debt (it's a shell game). It is the process by which the ECB has created three year loans through the LTRO at 1 % cost that allows banks to borrow, with pledged securities, and then buy sovereign debt. I refer to this process again in my Caution: Danger Ahead speech. In particular, I reference Italy. The Italian government guaranteed Italian bank loans and with this guarantee, the banks pledged these assets for additional ECB loans that provided the necessary liquidity to buy more Italian government debt, thus, my shell game reference. It is amazing to me that this game is allowed to continue. In the short-run it can but in the long term, reality will prevail. In a similar way, I believe institutions in this country knew that something was unsound, but they kept playing the credit game until the music stopped-----financial crisis. At FPA I did not allow this game to continue. Here in the United States we are seeing further concentration in the banking system. Now beyond TBTF, the financial excesses are unfolding at the federal level. I would argue that the monetary policy of Chairman Bernanke is creating that same type of environment of cancers in the system and we will not know what the negative effects are until later (just like we didn't know about the bad credit underwriting in the last cycle). Bernanke's interest rate policy is forcing various financial institutions and investors to take risks that they otherwise would not. I believe this policy is incredibly dangerous and unwise and I believe the Chairman should be replaced.
- Hersh ShefrinMinsky warned us that the seeds of the financial crises of tomorrow are sewn when we address the financial crises of the past. In this respect, the sovereign debt crisis of 2011 in Europe comes to mind, although the downgrade of Treasury debt by S&P shows that the U.S. is not immune. He went on to say that these crises are baked into the system, and are unavoidable. Therefore, we are well advised to establish mechanisms to soften the blows when they arrive. Minsky's reforms feature four categories: fiscal, employment, industrial, and financial. It means running large enough fiscal deficits, short-term, to offset dramatic decreases in aggregate demand in the private sector. It means having public employment programs in place to keep employment from plummeting. It means having measures in place to keep systemically important firms from becoming too large, therefore too big to fail. It means having the Fed play a more active role in financing at the discount window, so as to keep tabs of the growth in speculative and Ponzi financing, which is the locus of where blowouts happen. Interestingly, Minsky proposed eliminating the corporate income tax, because he felt it encouraged excessive corporate borrowing. In a nutshell, we would be well served by embracing the insights of an economist who died a decade before the financial crisis, but whose ideas, although spot on, received too little attention from academics, public policy makers, and the media. Whether or not we move to embrace Minsky's ideas more strongly in the future will depend on our collective vulnerability to psychological phenomena such as confirmation bias (discounting views counter to our own) and availability bias (overweighting information that is readily available). Indeed, confirmation bias is so strong, that it typically prevents us from overcoming our ideological positions and learning efficiently from experience. That is why Minsky's view is likely to prevail in the long run, meaning financial crises are inevitable.
Compiled by Gary Karz, CFA
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