The Wall Street Journal's Monday supplement, normally snooze-worthy, got cosmic today and offered up outtakes from a recent conference, the "Future of Finance Initiative." This kind of Big Think is catching. The Financial Times has been running a series for weeks on "The Future of Capitalism," which is roughly similar, if more attenuated. In fact, in Monday's FT, Alan Greenspan makes a return appearance -- he was in the FT Friday as part of his apologia series -- this time offering up the profound notion that a rising equity market could help things out.
The WSJ is into solutions, however, particularly on the regulatory front. The paper attempted the near-impossible: To take the conclusions, opinions and shots in the dark from a whole day of talking heads and crunch them into a mere 20 recommendations, a sort of executive summary. This is like trying to draw conclusion from a cocktail party; you sort of expected principle No. 21 to be: Fix the damn mess! Anyway, with principles ranging from giving the Federal Deposit Insurance Corp. more power to enhancing collateral to constraining leverage to limiting foreclosures, there aren't a lot of surprises. Indeed, it's where the consensus breaks down -- or where silence or prevarication reigns -- that you know you've got something interesting. Take executive compensation. The consensus of the confab is to limit exec comp at bailout banks and "be sure executive compensation provides the right set of incentives." Now that's a stand.
That said, there were a few moments where the conference headed into the deep water where interesting fish swim. Former New York Fed chief Peter Fisher had some cogent things to say on a number of issues, particularly underwriting standards for banks and the treatment of credit default swaps. And Paul Volcker, urging everyone to slow down and ponder tougher issues, asks some uncomfortable questions about the bandwagon for a systemic regulator -- like: what will it actually do? -- and then offers up the fundamental question that no one else seems to want to tackle: Is all of finance alike, or are there substantive differences that require differentiated regulation. He believes in the latter, which opens up the possibility of a new "split" in finance, a "new" form of Glass-Steagall.
Still, even Volcker can only introduce the subject, not explore it. And so at the risk of driving everyone back to ESPN.com, let me offer some questions that go beyond the Journal's handy 20 principles:
- Following Volcker, not only what will the systemic regulator do, but how will it determine what's a systemic risk and what's not? Will this be overseen by Congress, like traditional regulators, or have a quasi-independence, like the Fed? How will this key regulator cope with the "capture" problem? I may have missed it, but the problem of regulators being captured by the industry or the market was never mentioned in the reported gabfest.
- If we do follow Volcker in his new Glass-Steagall, how do we insure that the regulated sector remains competitive against more lightly regulated firms? How do we insure that commercial banks don't look like increasingly anachronistic wards of the government? Will these banks be protected against foreign competition? And how will that work?
- Will regulated commercial banks be allowed to sell loans off their balance sheets to free up capital? Or should regulated commercial banks be forced to remain accountable to the loans they have made?
- Who will determine key factors like leverage, which will shape the growth possibilities of a large swath of the financial and real economies? How will leverage be parceled out across finance? How will the government cope with the sense that it is picking winners and losers in finance -- and, by extension, the real economy?
- Will there be some transparency and consistency to key levers of regulation like capital, leverage and underwriting standards?
- The Big One: What kind of economy is this regulatory solution aimed at creating? This is a political as much as economic question. Are we aiming to restart our full-blown, credit-fueled consumer culture? Do we want to significantly ratchet that back, try to foster greater savings and less debt? Do we want an economy more like the '50s, dominated by large industrial companies? Or do we want to return to the entrepreneurial adventurism, with all its downsides, of the last 40 years?
On Friday, I criticized a column by the New York Times' Paul Krugman that urged a dismantling of much of the financial economy that has grown up since the '60s. The problem with Krugman's column, as it is here, is that we seem to have very little sense of the relationship between a large, vibrant and risky financial sector and growth in the real economy. Nearly every sentient being can agree that rules need to be tightened, transparency enhanced and bad boys spanked. But we're heading off into a wide-ranging reform process without even understanding what the effects of tighter leverage or greater accountability will be. As Volcker sagely says, "So I hope we take our time..." Agreed. - Robert Teitelman
See the Future of Finance mini-site on WSJ.com
See the Future of Capitalism mini-site on FT.com
See earlier post about Krugman from Dealscape
Robert Teitelman is the editor in chief of The Deal.
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It doesn't make sense to expect regulation to work. Fannie and Freddie failed despite intense oversight. It is odd to read comments (not here) that the cause of the crisis is because regulators "let" companies do this stuff.
The easiest and only sure way to make sure this can't happen again is to limit entity size. No bank should have over say 3% of deposits, require derivatives to trade through a clearing exchange and so on. Then, when banks go broke, they get shut down, rather than propped up.