John Maynard Keynes is remembered for many quotes and one of the most memorable ones is his claim that “In the long run we are all dead.” Keynes wrote this remark to criticize the belief that inflation would acceptably control itself without government intervention. That is, he argued that the theoretically determined equilibrium of an economy was not a good guide to the future in a very volatile economic situation.
The statement has been used, however, as an excuse for choosing the economic policy of a government based short run outcomes. The most prominent short run outcome sought over the past fifty years has been the maintenance of high levels of employment…or, low levels of unemployment.
The problem is that fifty years of government stimulus, basically credit inflation, aimed at achieving low levels of unemployment have created a cumulative build up in debt and a general attitude toward debt that perpetuates a desire for “more-of-the-same.”
And, over this past fifty years, the purchasing power of the dollar has declined by 85%; the under-employed in the country are in excess of 20% of the working force; and the income distribution has become dramatically skewed toward higher income recipients.
Not surprisingly, the economic and financial crisis of the past few years has been met with calls for more fiscal stimulus and wide-open monetary policy. The result: yearly federal government budget deficits of over $1.5 trillion with an estimated cumulative deficit over the next ten years in excess of $15 trillion. In terms of monetary policy, excess reserves in the banking system have reached $1.2 trillion. All this, of course, to get the economy going again.
Here, however, is where moral hazard enters the picture. The behavior patterns of finance people, developed over the last fifty years, “kicks in” once people see that the same old spending habits of the government are still in place.
I call your attention to the opinion piece by John Plender in the Financial Times this morning, “Bad Habits of Credit Bubble Make Worrying Comeback.” (http://www.ft.com/cms/s/0/26d644be-3ea8-11e0-834e-00144feabdc0.html#axzz1EmwjGnnL)
Mr. Plender begins: “Here we go again. The start of the year in debt markets has been marked by record low yields on junk bonds, declining underwriting standards and a return of the more dangerous innovations of yesteryear such as payment-in-kind toggles which allow borrowers to issue more debt to pay the interest bill. Even covenant-life loans, where normal borrowing conditions are shelved, have made a comeback in the leveraged buyout market and elsewhere, at a time when hapless small and medium sized firms are hard pressed to find credit.
A surplus of savings over investment is thus building up in the system and the US is once again accommodating the savings gluttons with an ongoing commitment to loose policy…No surprise, then, that the search for yield is back in evidence. With Federal Reserve chairman Ben Bernanke keeping policy interest rates at rock bottom, investors are being driven into riskier assets such as junk bonds and leveraged loans.”
Has the “music” started up once more so that people must start dancing again? Someone call “Chuck” Prince, former chairman of Citigroup, to get his “take” on the timing.
Fifty year policies are not just present in the economic policies of government. They exist elsewhere as well. Check out the Tom Friedman’s column “If Not Now, When?” in the New York Times this morning. (http://www.nytimes.com/2011/02/23/opinion/23friedman.html?hp)
Here Friedman discusses energy policy: “For the last 50 years, America (and Europe and Asia) have treated the Middle East as if it were just a collection of big gas stations: Saudi station, Iran station, Kuwait station, Bahrain station, Egypt station, Libya station, Iraq station, United Arab Emirates station, etc. Our message to the region has been very consistent: ‘Guys (it was only guys we spoke with), here’s the deal. Keep your pumps open, your oil prices low, don’t bother the Israelis too much and, as far as we’re concerned, you can do whatever you want out back. You can deprive your people of whatever civil rights you like. You can engage in however much corruption you like. You can preach whatever intolerance from your mosques that you like. You can print whatever conspiracy theories about us in your newspapers that you like. You can keep your women as illiterate as you like. You can create whatever vast welfare-state economies, without any innovative capacity, that you like. You can undereducate your youth as much as you like. Just keep your pumps open, your oil prices low, don’t hassle the Jews too much — and you can do whatever you want out back.’”
Fifty years is a long time. The buildup of fifty years of economic policies and energy policies can result in a lot of excess baggage hanging around that must be dealt with. A fifty-year build up not only requires a major re-structuring of nations and economies, it also requires a huge shift in the mindset of many, many people.
You want the deficit to come down in the short run and monetary policy to be reversed because it is potentially inflationary? It just ain’t going to happen in the near term.
You want an energy policy that is going to immediately get us off of oil so that we can stop subsidizing dictators and autocrats in the Middle East? It just ain’t going to happen in the near term.
And, so on and so on…
What seems to be missing is the leadership to change our mindset and develop a new paradigm that will set us on a pathway to re-structure our economy and our lives. I don’t think we want to dance the same old dance we have been doing for the past fifty years. Yet, it seems as if we have no choice but to start dancing again because the bank has begun to play the music once more.
The leadership just does not seem to be here, either in America, or in Europe, or in Asia. And, no one is strong enough to want to inflict on people the consequences of ‘getting the house in order again.’ I guess one can say, in line with the earlier comments of the mayor-elect of Chicago, Rahm Emanuel, that the leadership in the United States (and in Europe and in Asia) has “”let a crisis go to waste!”
The question that is still unanswered is “Has Keynes’ long-run arrived yet or do we still have to wait for it?” If it has not arrived yet, then it is still to come. Payment will be collected sometime. However, if this ‘long-run’ is still to come then my advice to those that work in financial institutions or in the financial markets is…start dancing again if you haven’t already started for the music has begun once again.
Showing posts with label moral hazard. Show all posts
Showing posts with label moral hazard. Show all posts
Wednesday, February 23, 2011
Tuesday, January 26, 2010
Regulation and Information--Part C
The final point I would like to make in this series is that you cannot build and maintain a rigid financial regulatory system based on the achievement of specific outcomes if you insist on inflating the economy that includes this regulatory system and expect the regulated institutions to remain idle. This is the story of the last 50 years when the dollar lost 85% of its purchasing power. If the government creates an inflationary environment, financial institutions will not stand still, especially in this Age of Information.
Also, in my view, the United States government has injected large amounts of moral hazard into the economy and the financial markets over the past fifty years or so. And, the presence of this moral hazard has had a lot to do with the recent collapse of the financial markets and the economy.
Before going into this let me just say that I believe that almost everyone is greedy. I use the word greedy with all the bad things it conveys, because that is the word being tossed around so loosely these days. I do not believe, as the economist Joseph Stiglitz seems to, that the bankers of Wall Street are any more “morally bankrupt” than he is or any of the rest of us. We all are greedy and respond to the incentives that are placed before us. With that said, let’s now move on.
I want to concentrate on two specific areas in which the government has created moral hazard and helped to form the incentives that led to the bust of 2008. The first has to do with monetary policy and the second has to do with housing finance. Both have contributed to what I have called the credit inflation of the last 50 years.
A credit inflation occurs when the credit in an economy grows more rapidly than the economy itself or more rapidly than specific sectors in the economy. In the early part of the period under review, focus was primarily on consumer and wholesale price inflation. At this time, analysts were mainly concerned with money stock growth and the consumer price index or the GDP Deflator. Asset bubbles were not on the radar yet.
However, inflation creates the incentive to increase debt and as the amount of debt in the economy increases there is pressure on both financial and non-financial institutions to increase their financial leverage, to create a greater mismatch between the maturities of their assets and liabilities, and to take on riskier assets, to goose up returns. Credit creation thrives in an inflationary environment!
Inflation is good for credit and so the cumulative effect of a period of inflation is the creation of more debt! In the Age of Information, the incentive to create more debt is a license for financial innovation.
The dance began in the 1960s and, as former Citigroup CEO “Chuck” Prince so eloquently expressed it in the 2000s, if the music continues to play, you must continue to dance!
And, the enormous creation of credit spilled over into sectors other than consumer purchases creating a bubble here and a bubble there. The beauty about financial innovation in the Age of Information is that specific assets and specific asset markets don’t really matter because all that is being traded is information. The result: as “Chuck” Prince implied, the dance continued in the areas where the music was still playing. Credit flowed into the markets that had the most action so that you got one market “popping” at this time and another market “popping” at another time. And, innovations in new financial instruments and markets were created to help the music flow to all markets.
How does this scenario relate to monetary policy? Well, the monetary authorities acted in a very asymmetrical way. If markets seemed to be dropping, the Federal Reserve would come in and stop the fall. This was especially important if unemployment seemed to be impacted by the drop. The behavior became so predictable that it was given a name: the “Greenspan put.”
On the upside, the central bank attempted to maintain control of consumer price inflation, especially after the pain of the late 1970s and early 1980s, but believed that it could do nothing with respect to asset bubbles that inflated prices in various sub-markets, like housing.
The moral hazard that was created allowed prices to constantly rise for the Fed would always reflate the economy before there was any chance for prices to fall. And, consumers could only buy about 15 cents worth of goods and services in 2010 with what $1.00 could buy in January 1961. Also in asset markets like housing, prices rose and rose and rose during this period to the point where people were absolutely confident that housing prices could never fall. So, where are you going to place your bets after all this time which created the fundamental assumption that policymakers would continue the credit inflation indefinitely.
The other area where the government created moral hazard was in the housing market. To own your home is a big part of the “American Dream.” Owning your own home creates self-respect and stability. It is a great place to raise kids and it generates community. It produces good citizens.
So, anything that can be done to support home ownership in America is good!
The savings and loan industry was dedicated to financing homes. The Federal Housing Administration (FHA) was there to help people get mortgages for homes and played a huge role in home ownership for GIs returning home from World War II. But, Fannie Mae and Freddie Mac were created to help mortgage finance and to make sure money flowed into the industry. Then the Department of Housing and Urban Development was created and help flowed through a myriad of programs to assist low-income families to own their own homes. And, then the mortgage-backed security was created and so on and so forth.
Ultimately, we got a great information age idea, the sub-prime loan. This program combines the drive to get home ownership to more and more individuals and families, often without the needed financial wherewithal, and credit inflation, because if housing prices never go down they must be going up. And, this allows people who cannot afford the down-payment on a house to earn that down-payment through the inflation of the price of their home. Oh, by-the-way, you can originate the loans and then get them packaged and securitized to sell to financial institutions in China or Sweden.
Isn’t the Age of Information great! If the government has anything to say about it, “No downside risk!”
Well, Fannie Mae and Freddie Mac own most of the American mortgage market now and both are ‘bankrupt.’ The FHA is in deep, deep financial trouble. And, so are many banks and other financial institutions in the United States. And, the Treasury is going crazy trying to develop a program or programs that will help individuals and families stay out of foreclosure and lose their homes.
Bottom line: in the Age of Information, information spreads and spreads rapidly. Financial innovation will accelerate as we go forward for financial innovation will be applied to any area, regulated or not, that promises financial gain. Unfortunately, my guess is that the federal government and Congress will not have the discipline it needs to stop creating credit inflations and to keep from creating more and more moral hazard in the future. Consequently, the financial regulation that will be forthcoming will be backwards looking and, hence, will not prevent the next crisis.
Also, in my view, the United States government has injected large amounts of moral hazard into the economy and the financial markets over the past fifty years or so. And, the presence of this moral hazard has had a lot to do with the recent collapse of the financial markets and the economy.
Before going into this let me just say that I believe that almost everyone is greedy. I use the word greedy with all the bad things it conveys, because that is the word being tossed around so loosely these days. I do not believe, as the economist Joseph Stiglitz seems to, that the bankers of Wall Street are any more “morally bankrupt” than he is or any of the rest of us. We all are greedy and respond to the incentives that are placed before us. With that said, let’s now move on.
I want to concentrate on two specific areas in which the government has created moral hazard and helped to form the incentives that led to the bust of 2008. The first has to do with monetary policy and the second has to do with housing finance. Both have contributed to what I have called the credit inflation of the last 50 years.
A credit inflation occurs when the credit in an economy grows more rapidly than the economy itself or more rapidly than specific sectors in the economy. In the early part of the period under review, focus was primarily on consumer and wholesale price inflation. At this time, analysts were mainly concerned with money stock growth and the consumer price index or the GDP Deflator. Asset bubbles were not on the radar yet.
However, inflation creates the incentive to increase debt and as the amount of debt in the economy increases there is pressure on both financial and non-financial institutions to increase their financial leverage, to create a greater mismatch between the maturities of their assets and liabilities, and to take on riskier assets, to goose up returns. Credit creation thrives in an inflationary environment!
Inflation is good for credit and so the cumulative effect of a period of inflation is the creation of more debt! In the Age of Information, the incentive to create more debt is a license for financial innovation.
The dance began in the 1960s and, as former Citigroup CEO “Chuck” Prince so eloquently expressed it in the 2000s, if the music continues to play, you must continue to dance!
And, the enormous creation of credit spilled over into sectors other than consumer purchases creating a bubble here and a bubble there. The beauty about financial innovation in the Age of Information is that specific assets and specific asset markets don’t really matter because all that is being traded is information. The result: as “Chuck” Prince implied, the dance continued in the areas where the music was still playing. Credit flowed into the markets that had the most action so that you got one market “popping” at this time and another market “popping” at another time. And, innovations in new financial instruments and markets were created to help the music flow to all markets.
How does this scenario relate to monetary policy? Well, the monetary authorities acted in a very asymmetrical way. If markets seemed to be dropping, the Federal Reserve would come in and stop the fall. This was especially important if unemployment seemed to be impacted by the drop. The behavior became so predictable that it was given a name: the “Greenspan put.”
On the upside, the central bank attempted to maintain control of consumer price inflation, especially after the pain of the late 1970s and early 1980s, but believed that it could do nothing with respect to asset bubbles that inflated prices in various sub-markets, like housing.
The moral hazard that was created allowed prices to constantly rise for the Fed would always reflate the economy before there was any chance for prices to fall. And, consumers could only buy about 15 cents worth of goods and services in 2010 with what $1.00 could buy in January 1961. Also in asset markets like housing, prices rose and rose and rose during this period to the point where people were absolutely confident that housing prices could never fall. So, where are you going to place your bets after all this time which created the fundamental assumption that policymakers would continue the credit inflation indefinitely.
The other area where the government created moral hazard was in the housing market. To own your home is a big part of the “American Dream.” Owning your own home creates self-respect and stability. It is a great place to raise kids and it generates community. It produces good citizens.
So, anything that can be done to support home ownership in America is good!
The savings and loan industry was dedicated to financing homes. The Federal Housing Administration (FHA) was there to help people get mortgages for homes and played a huge role in home ownership for GIs returning home from World War II. But, Fannie Mae and Freddie Mac were created to help mortgage finance and to make sure money flowed into the industry. Then the Department of Housing and Urban Development was created and help flowed through a myriad of programs to assist low-income families to own their own homes. And, then the mortgage-backed security was created and so on and so forth.
Ultimately, we got a great information age idea, the sub-prime loan. This program combines the drive to get home ownership to more and more individuals and families, often without the needed financial wherewithal, and credit inflation, because if housing prices never go down they must be going up. And, this allows people who cannot afford the down-payment on a house to earn that down-payment through the inflation of the price of their home. Oh, by-the-way, you can originate the loans and then get them packaged and securitized to sell to financial institutions in China or Sweden.
Isn’t the Age of Information great! If the government has anything to say about it, “No downside risk!”
Well, Fannie Mae and Freddie Mac own most of the American mortgage market now and both are ‘bankrupt.’ The FHA is in deep, deep financial trouble. And, so are many banks and other financial institutions in the United States. And, the Treasury is going crazy trying to develop a program or programs that will help individuals and families stay out of foreclosure and lose their homes.
Bottom line: in the Age of Information, information spreads and spreads rapidly. Financial innovation will accelerate as we go forward for financial innovation will be applied to any area, regulated or not, that promises financial gain. Unfortunately, my guess is that the federal government and Congress will not have the discipline it needs to stop creating credit inflations and to keep from creating more and more moral hazard in the future. Consequently, the financial regulation that will be forthcoming will be backwards looking and, hence, will not prevent the next crisis.
Tuesday, January 19, 2010
The Move Toward More Regulation
The air is heating up when it comes to the subject of banking regulation. The only advice I can offer those considering changes in the regulatory environment is “be careful.”
The main reason for this caution?
John Bogle, the founder and former chief executive of the Vanguard Group, wrote it very succinctly in the Wall Street Journal this morning: “There are few regulations that smart, motivated, targets cannot evade.” (See “Restoring Faith in Financial Markets: http://online.wsj.com/article/SB20001424052748703436504574640523013840290.html#mod=todays_us_opinion.)
Another reason for this caution comes from Mervyn King, governor of the Bank of England: “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.” Andrew Ross Sorkin provided this quote in the New York Times this morning. (See “Big, in Banks, is in the Eye of the Beholder”: http://www.nytimes.com/2010/01/19/business/19sorkin.html?ref=business.)
According to these two individuals, banks cannot be prevented from engaging in the types of activities that they really want to be engaged in and there is little that supervision can do to keep them from failing due to speculative activities.
In other words, bankers cannot be protected from themselves.
Why is this?
There are two very good reasons. First, in this Information Age, almost anything can be done with cash flows and risk, and regulators will always be behind the curve in trying to catch up with what is going on in the financial sector. After the financial crisis of 2008, this type of behavior has began again in the bigger banking organizations and I would argue that the regulators are already at least three- to six-months behind what these institutions are now doing.
Second, the financial community is truly global now and the flow of money (information) is very fluid. If something cannot be done somewhere it can always move elsewhere. Discussions about what the BRICs are doing (see the week long series of articles on Brazil, Russia, India, and China in the Financial Times this week) present one picture of how the world is continuing to shrink, financially. Another picture of the flow of funds throughout the world is captured in a recent research paper by MIT’s Ricardo Caballero which is quoted in the recent article in Time magazine: “Did Foreigners Cause America’s Financial Crisis?” by Stephen Gandel. (See http://www.time.com/time/business/article/0,8599,1954240,00.html.)
I would like to make one other point: many people continue to assume that behind active governmental policy and regulation are government officials and bureaucrats that are either more perceptive and talented than their private sector counterparts, or, are less self-serving than their private sector counterparts, or, are better placed to observe how the world works than are their private sector counterparts.
In my estimation, government officials and bureaucrats are not more capable or talented than their private sector counterparts and they are certainly not less self-interested. Furthermore, in my experience in government, they are not better placed or better informed about what is going on in the world. This latter point is one that the economist Friedrich Hayek made over and over again.
There is no research that I have seen that indicates that those that work for government perform any better than those that work in the private sector. If anything, the argument goes the other way: government cannot hire or attract people of the same quality that work in the private sector. Furthermore, there is no evidence to prove, in my mind, that people that work in government service are any less greedy for advancement or personal gain than are people that work in the private sector.
Finally, in their attempt to protect the society from “bad outcomes” the government has tended to err on the side of creating an environment for greater and greater private sector risk-taking. This has come in several forms. The obvious case currently is the “Greenspan put” or the bank bailouts that have created moral hazard and greater and greater amounts of risk taking. (See the article by Peter Boone and Simon Johnson in today’s Financial Times, “A Bank Levy will not stop the Doomsday Cycle”: http://www.ft.com/cms/s/0/e118fcc2-0461-11df-8603-00144feabdc0.html.)
Another case relates to the underlying emphasis on trying to maintain low levels of unemployment. This has created an environment that encourages risk taking in terms of increased financial leverage, maturity mismatching, and financial innovation. I have referred to the whole period from 1960 to the present as one in which the government underwrote an environment of credit inflation.
Furthermore, this continual effort to stimulate the economy has tended to put people back to work in jobs that were outdated or in industries that needed change. In order to protect the worker, the easiest and best approach was to put workers back into their old jobs. We see the consequence of this policy in the problems experienced in the auto industry, the steel industry, and many other areas that formerly represented the industrial base of America.
Last, special interest programs, such as housing, although designed with good intent, have ended up with several government agencies serving as the residual lender and insurer of mortgages. Over the past several years we have focused on Fannie Mae and Freddie Mac, but it is now obvious that we cannot ignore the FHA. (See the article by Nick Timiraos in today’s Wall Street Journal, “Souring Mortgages, Weak Market Put Loan Agency on a Tightrope”: http://online.wsj.com/article/SB20001424052748704586504574654710172000646.html#mod=todays_us_page_one.) This effort has resulted in the federal government becoming biggest player in the housing market, by a long shot!
To me, regulation of the banking sector should focus on two things. The first relates to capital requirements. They should be raised.
Second, there needs to be greater transparency and openness in transactions, deals, and balance sheets.
Almost every other kind of regulation that can be put on the books, in the words of John Bogle, can be evaded. We cannot protect the bankers from themselves. But, we can attempt to protect investors and other wealth holders by giving them more information about those institutions they want to invest in. But, like the bankers, ultimately we cannot protect these investors and other wealth holders from themselves.
The main reason for this caution?
John Bogle, the founder and former chief executive of the Vanguard Group, wrote it very succinctly in the Wall Street Journal this morning: “There are few regulations that smart, motivated, targets cannot evade.” (See “Restoring Faith in Financial Markets: http://online.wsj.com/article/SB20001424052748703436504574640523013840290.html#mod=todays_us_opinion.)
Another reason for this caution comes from Mervyn King, governor of the Bank of England: “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.” Andrew Ross Sorkin provided this quote in the New York Times this morning. (See “Big, in Banks, is in the Eye of the Beholder”: http://www.nytimes.com/2010/01/19/business/19sorkin.html?ref=business.)
According to these two individuals, banks cannot be prevented from engaging in the types of activities that they really want to be engaged in and there is little that supervision can do to keep them from failing due to speculative activities.
In other words, bankers cannot be protected from themselves.
Why is this?
There are two very good reasons. First, in this Information Age, almost anything can be done with cash flows and risk, and regulators will always be behind the curve in trying to catch up with what is going on in the financial sector. After the financial crisis of 2008, this type of behavior has began again in the bigger banking organizations and I would argue that the regulators are already at least three- to six-months behind what these institutions are now doing.
Second, the financial community is truly global now and the flow of money (information) is very fluid. If something cannot be done somewhere it can always move elsewhere. Discussions about what the BRICs are doing (see the week long series of articles on Brazil, Russia, India, and China in the Financial Times this week) present one picture of how the world is continuing to shrink, financially. Another picture of the flow of funds throughout the world is captured in a recent research paper by MIT’s Ricardo Caballero which is quoted in the recent article in Time magazine: “Did Foreigners Cause America’s Financial Crisis?” by Stephen Gandel. (See http://www.time.com/time/business/article/0,8599,1954240,00.html.)
I would like to make one other point: many people continue to assume that behind active governmental policy and regulation are government officials and bureaucrats that are either more perceptive and talented than their private sector counterparts, or, are less self-serving than their private sector counterparts, or, are better placed to observe how the world works than are their private sector counterparts.
In my estimation, government officials and bureaucrats are not more capable or talented than their private sector counterparts and they are certainly not less self-interested. Furthermore, in my experience in government, they are not better placed or better informed about what is going on in the world. This latter point is one that the economist Friedrich Hayek made over and over again.
There is no research that I have seen that indicates that those that work for government perform any better than those that work in the private sector. If anything, the argument goes the other way: government cannot hire or attract people of the same quality that work in the private sector. Furthermore, there is no evidence to prove, in my mind, that people that work in government service are any less greedy for advancement or personal gain than are people that work in the private sector.
Finally, in their attempt to protect the society from “bad outcomes” the government has tended to err on the side of creating an environment for greater and greater private sector risk-taking. This has come in several forms. The obvious case currently is the “Greenspan put” or the bank bailouts that have created moral hazard and greater and greater amounts of risk taking. (See the article by Peter Boone and Simon Johnson in today’s Financial Times, “A Bank Levy will not stop the Doomsday Cycle”: http://www.ft.com/cms/s/0/e118fcc2-0461-11df-8603-00144feabdc0.html.)
Another case relates to the underlying emphasis on trying to maintain low levels of unemployment. This has created an environment that encourages risk taking in terms of increased financial leverage, maturity mismatching, and financial innovation. I have referred to the whole period from 1960 to the present as one in which the government underwrote an environment of credit inflation.
Furthermore, this continual effort to stimulate the economy has tended to put people back to work in jobs that were outdated or in industries that needed change. In order to protect the worker, the easiest and best approach was to put workers back into their old jobs. We see the consequence of this policy in the problems experienced in the auto industry, the steel industry, and many other areas that formerly represented the industrial base of America.
Last, special interest programs, such as housing, although designed with good intent, have ended up with several government agencies serving as the residual lender and insurer of mortgages. Over the past several years we have focused on Fannie Mae and Freddie Mac, but it is now obvious that we cannot ignore the FHA. (See the article by Nick Timiraos in today’s Wall Street Journal, “Souring Mortgages, Weak Market Put Loan Agency on a Tightrope”: http://online.wsj.com/article/SB20001424052748704586504574654710172000646.html#mod=todays_us_page_one.) This effort has resulted in the federal government becoming biggest player in the housing market, by a long shot!
To me, regulation of the banking sector should focus on two things. The first relates to capital requirements. They should be raised.
Second, there needs to be greater transparency and openness in transactions, deals, and balance sheets.
Almost every other kind of regulation that can be put on the books, in the words of John Bogle, can be evaded. We cannot protect the bankers from themselves. But, we can attempt to protect investors and other wealth holders by giving them more information about those institutions they want to invest in. But, like the bankers, ultimately we cannot protect these investors and other wealth holders from themselves.
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