Hey, Congress, Fix This Now!

OK, I'll admit it. I've been pretty darn negative lately when it comes to financial reform. I've knocked the Dodd bill, criticized Krugman, and dismissed Geithner.

Am I just a grump who enjoys shooting down everyone else's ideas? I'd like to think not. I just want our government to put forth a comprehensive set of reforms that will actually help defuse the volatile financial system.

So what does that look like? I don't pretend to have an answer for everything, but I think the following are the most important areas that need to be addressed.

1. Regulate shadow banking
The "shadow" banking system is basically an off-the-grid financial market that sprung up so that financial institutions could make far more money than they could within the highly regulated traditional banking system. Troublingly, it was through the shadow market that companies like Lehman Brothers, Goldman Sachs, Morgan Stanley (NYSE: MS  ) , Merrill Lynch, and Bear Stearns borrowed money to leverage themselves to untold heights.

The key here is to turn on the lights in the shadow markets and start regulating what goes on in these areas, particularly when it comes to participants' ability to lever up their balance sheets. As Walter Sobchak said in The Big Lebowski, "This isn't 'Nam ... There are rules." Or at least, there need to be.

2. Too big to fail
Though there's been plenty of jawboning about reducing "too big to fail," all we've seen so far is the opposite. JPMorgan Chase (NYSE: JPM  ) absorbed Bear Stearns and Washington Mutual, Bank of America (NYSE: BAC  ) took over Countrywide and Merrill Lynch, and Wells Fargo (NYSE: WFC  ) acquired Wachovia.

These banks were all too big to fail before, and now they're just too bigger to fail.

Regulators need to put hard limits on how large banks get, so that we don't have them holding a gun to the financial system's head when their bets go wrong. Sen. Sherrod Brown, D-Ohio, has proposed an amendment to a Senate bill that would require bank holding companies to limit nondeposit liabilities to 3% of annual U.S. GDP. And the calculation would include off-balance-sheet liabilities.

The specifics of Brown's amendment could be debated, but what's notable is that he's proposed a clear, specific measure to limit the size of banks.

3. Make banking boring
Thanks to deposit guarantees from the FDIC and dealings with the Federal Reserve, it's hard to call banks truly private institutions. For that reason, they should be focused solely on their primary objective -- taking deposits and making loans.

For a long time banks were prohibited from taking part in riskier activities, and it's time to resurrect that prohibition. Investing in banks should have the boring but dependable feel of investing in a utility, not the gut-churning excitement of a tech stock.

4. Crack down on derivatives
Keeping derivatives trading behind closed doors -- or operating "over the counter," as the insiders like to say -- makes for a fabulously profitable business for big investment banks like Goldman and JPMorgan, but it's often bad news for customers and risky for the financial system as a whole.

Putting derivatives on open exchanges is a huge step in the right direction. Another big issue -- particularly if we want to avoid another AIG (NYSE: AIG  ) disaster -- is to standardize and enforce the reserves that derivatives issuers hold to cushion against losses.

5. Eliminate stupid lending
Government types like to label this area "consumer protection." The way I see it, though, the banks have suffered just as much as consumers in most cases, as their own stupidity in lending money that shouldn't have been lent has come back to haunt them.

The reform solution here is simple: eliminate stupid loans. If you need 100% financing to buy a house, you probably shouldn't be buying a house. If you need a "teaser" interest rate to be able to afford your mortgage payment, you probably shouldn't be buying a house. And this includes the government's ill-conceived low-down-payment lending programs.

6. Discard Fannie and Freddie
While we're slapping at the government's overreaching hand, let's go ahead and put Fannie Mae (NYSE: FNM  ) and Freddie Mac out of their misery. Unfortunately, this can't happen particularly quickly because of their size and entrenchment in the system, but setting a timetable of a decade or so to defuse these financial nukes seems like it would be a big positive.

7. Reform the ratings agencies
If you have read Michael Lewis' The Big Short, you're probably acutely aware of how big a part Moody's (NYSE: MCO  ) and Standard & Poor's played in the buildup to the financial crisis. If nothing else, ratings agencies' businesses need to be realigned so that they are no longer paid by the companies that issue the bonds they are rating.

Join in
Think I've missed something important here? Join in the discussion by scrolling down to the comments section and sharing your thoughts on what needs to be done to reform the U.S. financial system.

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


Read/Post Comments (39) | Recommend This Article (99)

Comments from our Foolish Readers

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  • Report this Comment On April 20, 2010, at 10:54 AM, nuttincowboy wrote:

    You've got the right idea..

    I've been "beaking" about not only the inevitable crash in the derivatives market; but the Fed's involvement in Wall St. & it's incestuous relationship with Goldman Sachs.

    Truth be known; the Fed has funded bubbles in everything from oil to corn through it's opening of its' discount window to "investment banks" a few years ago.

    I for one am tired of paying for getting screwed twice every time I pull up to a gas pump or buy food. I pay for the speculation in the derivatives market based on these commodities & I pay for the Fed's money in a dearth of consumer credit & small business loans available to "Joe Sixpack".

    If we don't put these "Robber Barons" in their place; we will surly face a scenario that will make 1927 look like a cakewalk.

    Give 'em hell!!!

  • Report this Comment On April 20, 2010, at 1:19 PM, rhutmacher wrote:

    Why can't we just let the people making malinvestments pay for them. If a bank decided to do some risky lending, such as what's happening now with this new housing bubble, let them deal with the consequences. Banks do not need to be regulated if they are taught that their mistakes fall on them. Let the banks do what they want, just let the investors decide what to do with their own money. If Joe Schmoe buys stock in JPMorgan, and they tank due to shaky practices, thats Joe's fault for not researching his investment.

  • Report this Comment On April 20, 2010, at 2:10 PM, Melaschasm wrote:

    My number one complaint is the legalization of 'off balance sheet accounting'. Such accounting rules directly contradict the entire philosophy behind the creation of GAAP and auditing companies. If everything must be on the balance sheet, then it becomes much more difficult to commit fraud.

  • Report this Comment On April 20, 2010, at 2:29 PM, Turfscape wrote:

    Just nice to see you quoting Walter Sobchak!

  • Report this Comment On April 20, 2010, at 2:44 PM, Lazarill0 wrote:

    I very much enjoyed the "top 7" list: it provides some nice suggestions of financial stability and a safer economy, while not locking down capital.

    I mostly wanted to comment upon rhutmacher's words: It's all fine & dandy to let the companies that fail suffer the consequences. The problem is that these companies are HIDING their practices. Much of what Mr. Koppenheffer is suggesting are ways in which to either (a) reduce obfuscation, or (b) decouple the gov't from "wild West" investing institutions. (E.g., on the latter, suggesting that the FDIC and the Federal Reserve, which are both at least partially gov't-owned, can only help out "boring" banks.)

    I know that I currently feel VERY uncomfortable buying any financial stocks because I simply cannot trust them. GS is one of the more "honest" of the gangster financial institutions, and I certainly wouldn't trust them. Reducing obfuscation in the entire financial system is good for the wild West institutions, too. I think most of them realize that it's the right thing to do, it's simply not something they can do alone. (Similar to Greek citizens: they know that taxes are needed to keep the gov't running, but no one wants to be the sole honest chump paying his/her "fair burden" because at that point the burden is no longer fairly shared.)

  • Report this Comment On April 20, 2010, at 3:04 PM, plange01 wrote:

    big name financial firms are already selling their holdings in goldman stock.any dealing with this company will be looked at by the investigators...

  • Report this Comment On April 20, 2010, at 3:30 PM, grumpycritic wrote:

    Derivatives are too ingrained in the system to be eliminated. However there is a way to make them undesirable and avoided. By Wall Street's own definition most of these are simply bets and betting is gambling. The IRS should define them as such ( they probably already have the authority) and tax them under the more stringent provisions of gambling earnings.

    Imagine the increased taxes that would have to be paid; the brokerage paper work that would have to be generated to distinguish investment from bet; and last but not least the embarrassment of bankers by being classified as bookies

    The market should channel the nations savings into productive enterprise, not put 80% in a giant edy of

    Derivatives should be eliminated but are probably too ingrained for this to happen. However, there is a way to make undesirable.

    This is for the IRS to classify them for what they are: gambling bets. They may already have this authority. It is ridiculous to tax them as equities and not under the more stringent provisions of gambling gains and losses.

    Besides the increas of taxes paid; imagine the increase in brokerage paper work distinguishing between bet and investment and last but not least the embarrassment to bankers and brokers by being identified as bookies

    The purpose of the market is to channel the nations savings into productive enterprise. It is not to place 80% of these funds in a giant casino eddy where they simply pass from hand to hand.

    Derivatives are the true toxic asset swallowing up our nations investment capital

    $

  • Report this Comment On April 20, 2010, at 4:03 PM, plange01 wrote:

    once the high level politicions with ties to goldman sacks have been isilated then the case will continue.goldman has paid off a amazing amount of high level politicions ....

  • Report this Comment On April 20, 2010, at 4:12 PM, Hydpdx wrote:

    We need to let banks fail when they make mistakes if we are to let them reward themselves in better times. In order to do that the banks shouldn't put FDIC guaranteed deposits at risk and need to be small enough to be dismantled.

    Separate out commercial banking (holding deposits with FDIC guarantees) from investment banking that either underwrite stock offerings or have proprietary desks that trade securities (mortgage-backed etc.) for their own accounts (the proposed Volcker rule).

    Several studies have shown that bigger banks (beyond about $100B in assets) do not enjoy economies of scale. They only get more powerful and wield enormous clout - much to the detriment of main street. We need to find a way to cap the size of a bank. Capital and reserve requirements are great but I'm not sure if they can adequately address the "too big to fail" issue.

  • Report this Comment On April 20, 2010, at 4:34 PM, Adam1226 wrote:

    I would add "stop printing money!!!"

  • Report this Comment On April 20, 2010, at 4:53 PM, cpipes wrote:

    Good ideas. How about banning naked shorting?

  • Report this Comment On April 20, 2010, at 5:00 PM, bunjejump wrote:

    One of the other causes of the recent financial mess is the lack of personal financial management knowledge by the body politic. Personal financial management courses should be required subjects for persons graduating from high school and from college. How to budget, how to use credit, how to avoid scams, how to manage money and how to plan for retirement should be topics worth teaching to young people just entering the workforce.

  • Report this Comment On April 20, 2010, at 5:06 PM, TMFKopp wrote:

    @bunjejump

    "Personal financial management courses should be required subjects for persons graduating from high school and from college."

    I couldn't agree more.

    Now I'm not totally sure if that would have prevented the financial meltdown, as it was driven in large part by the kind of greed that tends to play "Whac-a-Mole" with the part of some people's brains that says "I know better than this" -- and that's the educated and non-educated alike.

    Of course, it could also be argued that if this country had better financial education to begin with, the high levels of consumer debt -- which have been building for decades -- may not have ever gotten to the extreme levels that we were at post-crisis (and frankly really still at today).

    The Fool has long been a vocal proponent of financial education and I think the U.S. would be a much better place for it.

    Matt

  • Report this Comment On April 20, 2010, at 5:13 PM, gladlylearn wrote:

    Why not simply reinstate the 1933 Glass-Steagall act that required the separation of ordinary banking from investment banking? This seemed to work until we decided to repeal it in 1980 and deregulate the banking industry. As someone said, we learn a lot in the short term, a little in the medium term and nothing in the long term.

    Reinstating the act means the investment bank sector would be prevented from gambling with bank deposits and would have to rely on investment accounts for their capital. Stock market gamblers could make or lose their own money in investments, but the ordinary banks used by citizens and industries would be protected.

    The investment banking system would also be more subject to ordinary market forces. High risk can give high reward; it can also take you down. Investment banks would be a little more careful with their reputations and their risks if they have no access to non-gambling accounts for their investments. Derivatives and other complex financial instruments would be treated as much more explosive than before.

    Lehman going down would be a lot less of a problem if it did not bring down ordinary banks with them.

    I am also very much in favor of more transparency in the banking business. However, many in the business will fight this or find ways around it for virtuous public reasons and powerful not-so-virtuous private reasons. This will be a continuous problem because transparency is always a matter of degree.

  • Report this Comment On April 20, 2010, at 5:19 PM, TMFKopp wrote:

    @rhutmacher

    "Why can't we just let the people making malinvestments pay for them."

    A few other folks have commented on this, but I think it's a particularly important point.

    First, at its face, I agree with that -- companies that make bad financial bets need to be allowed to fail.

    However, there are a few caveats to that. First of all, you have to make sure that the firm that is about to fail isn't "load bearing." That is, just as you can't go into a house, knock down a load bearing wall, and expect the house to stay intact, you can't allow a select few giant firms become the backbone of the financial system and expect that system to easily absorb the failure of any one of them -- let alone a few of them.

    That, then, means that you either have to be ready to rescue the big boys when they fail (which is not only politically unpopular but, IMHO, stupid), or prevent them from becoming necessary to proper financial system functioning. Which, of course, means, among other things, limiting size. The idea that you're suggesting -- no regulations, and allow failures as they come -- would more than likely be pretty disastrous.

    And as to Joe Schmoe investing in JPMorgan stock. Frankly, nobody gives a flying squirrel about Joe Schmoe and his piddling stock holdings (not meaning to be demeaning here, just realistic -- after all, I'm Joe Schmoe too). The concerns over the failure of someone like JPM have little to do with the equity investors and a lot more to do with the functioning of the entire financial / credit system.

    Matt

  • Report this Comment On April 20, 2010, at 5:23 PM, TMFKopp wrote:

    @gladlylearn

    "Why not simply reinstate the 1933 Glass-Steagall act that required the separation of ordinary banking from investment banking?"

    This is the right idea, but frankly, we can do even better. G-S was born of Depression Era problems, and while the general idea is the same today -- separate out vanilla banking from the rest -- we're probably better served putting together a G-S 2.0 that addresses "technological advances" in the finance industry that have happened since the 30's.

    Matt

  • Report this Comment On April 20, 2010, at 5:32 PM, BigHackAttack wrote:

    Well said, gladlylearn.

    Now kindly stop making sense -- you're just gonna confuse the rest of us.

  • Report this Comment On April 20, 2010, at 6:11 PM, markgiese wrote:

    I think it's about time to tie personal responsibility to performance. Individuals that make poor financial decisions are slapped with a poor credit rating that takes years to improve. Individuals at these organizations (whatever form they take) need to be tagged for the poor decisions they have made. "Professional credit ratings" for decision makers should be included in all quarterly reporting.

    You could extend this concept by connecting these "professional credit ratings" to the amount of capital required for trades made by each decision maker. This is a logical extension of the requirements placed on individuals during any credit application process.

  • Report this Comment On April 20, 2010, at 7:02 PM, guzmonfool wrote:

    The massive investment banks are beyond normal rules of capitalism, such as responsibility for their own mistakes, as they are completely integrated within the entire Federal Reserve/Treasury/Fed Government Financial Management of our economy. Repealing the Glass-Steagall Act has proven to have been purely for the benefit of a small few powerfully connected bankers. Is it any surprise that the biggest banks (Goldman-Sachs is the biggest) are the closest to the source of the excess money (i.e. Federal Reserve and Treasury), so are readily able to tap into that excess funding through questionable financial practices, to make gargantuan profits (billions) while the economy is tanked. Otherwise, where else is all this excess money coming from? Is it also a surprise that Goldman-Sach is basically the training ground for the majority of leaders on the Federal Govt Side of this financial mess? MF, please do a quick report on the history of all the key government reps (Bernake, Geitner, etc.) over the past 20 years and shock us all with the pedigrees of each that comes from the very institutions that are at the heart of these massive problems.

  • Report this Comment On April 20, 2010, at 7:39 PM, nfox101072 wrote:

    Make lobbying and lobbiests illegel

  • Report this Comment On April 20, 2010, at 7:47 PM, bobmuson wrote:

    We need a new CONTEXT for living. The prevailing context of a "You OR me" world is kaput.

    How about creating the context, a "You AND me" world?

    Trying to fix the CONTENT inside the "You OR me" CONTEXT keeps giving us a more, better, different version of the same world; that is, the world of: "I got mine; screw you, go get your own!"

    CONTEXT is decisive. It gives the world we live in.

    What would life be like in a world that works for everyone with no one and nothing left out,

    a "You AND me" world?

    I don't know.

  • Report this Comment On April 20, 2010, at 8:01 PM, jkeefe1 wrote:

    Speaking of ending incestuous relationships, isn't it about time we ended the revolving door between The Fed, The Treasury, and Goldman Sachs? I think there are plenty of intelligent economists and money managers out there without continually drawing from the same well of human resources.

    How about limiting the number of ex-Fed officials in the Treasury? A limit on the number of ex-Goldman Sachs executives in the Fed? And a strict limit on the number of ex-Treasury types showing up in the employ of both Goldman and the Fed?

    Now that's a reform I think we can all live better with.

  • Report this Comment On April 20, 2010, at 8:57 PM, penchy1 wrote:

    I would say "Caveat emptor", get Fannie and Freddie out of the way, teach people how to realistically measure their capacity to own a home and the only way you eliminate lobbying is to make it unattractive, i.e. have the government not be so big to effect every part of our lives.

    Let's face it, Fannie and Freddie caused this mess. The banks just acted on human nature.

  • Report this Comment On April 20, 2010, at 9:05 PM, ezed1 wrote:

    You are right on Matt. Is there any chance that anyone in congress is a Fool and reads this stuff?

  • Report this Comment On April 20, 2010, at 9:36 PM, gesheddc wrote:

    After I read this article, I looked around on the page, hoping to find a place to sign my name in agreement. How about if the Motley started a petition right here:

    Everyone in agreement with this "Hey, Congress, Fix

    It Now" article, could sign it, and the petition then delivered to the relevant committees in Congress. It would be great to have a petition on this subject, with this point of view, coming from investors.

  • Report this Comment On April 20, 2010, at 9:54 PM, xetn wrote:

    A few observations are in order:

    Nobody force anyone to purchase the "products" offered by the "shadow banking" group. What ever happened to the concept of "Let the Buyer Beware!"?

    Eliminate any and all bailouts and let the so-called greedy crooks live or die by their results.

    Eliminate the source of moral hazard; the Fed and the FDIC. Without these two primary crutches to the banking system, the concept of real risk and failure would do much more than any regulations you can dream up.

    The only real regulation of any market is the consumer voting with their money. When their is a real threat of loss, people automatically become more cautious. Does the idea of bank runs come to mind?

    The biggest problem with American and, for that matter, the rest of the world is the reliance on government to provide everything and eliminate the concept of risk and personal responsibility.

    In a true free market, people will exchange when and only when both parties to the exchange feel they are receiving more than they are giving up. That is a win-win system.

    The only "foolish" idea seems to want the Congress to "fix" things and then everything will be all right. I am sick of this constant propaganda for more government, when it is government's failure in the first place. If government regulation (all some 80000 pages of it as listed in the Federal Register) were any good, we would never have to worry. But the fix is always, If that regulation didn't work, then this one will.

  • Report this Comment On April 20, 2010, at 10:03 PM, NotJesseL wrote:

    I agree with this article 100%. To all the folks who said , caveat emptor, well, damn it, why didn't they let those fool banks just caveat emptor right down the toilet! The reason is we would have gone down the toilet with them, and that's why we need more regulation than a perfect Ayn Rand world would have. (In case you were wondering, I think there is a real need for regulation and has been ever since people stopped being perfect or basically good. (i.e. ever since there were people).

  • Report this Comment On April 20, 2010, at 10:09 PM, ARJTurgot wrote:

    I find much of your stuff and the Fool in general to be simplistic and superficial. This didn't happen only in the U.S., and American banks weren't the only ones operating this way.

    As it happens, the French bank Societe Generale has a far more sophisticated Quant and derivatives program than even GS, and had a demonstrated failure of control that threatened the entire French economy. The main identified perp in the GS/Paulson scam was a Frog working out of London. Iceland? Ireland? Barney Frank did not cause overpriced condos in Dublin or Keflavik, and neither did Alan Greenspan.

    Krugman, however, is an old 60's/70's Keynesian Liberal - pretentious, and full of crap. I doubt even his editors read him anymore. He's an example of why Liberals ended up so discredited.

  • Report this Comment On April 20, 2010, at 10:15 PM, Harley117 wrote:

    Glass-Steagall came at a time when domestic banks were just that. Now all of the large banks are globial banks and they have the ability to ship functions to other countries. The other thing that is not being mentioned is fact the collateral backing some of the loans deteriorated more than any prudent banker would believe possible. For example, in Arizona there are many loans where the barrower put 20% down but the value of the real estate has dropped by 50%. It is hard to call that a reckless loan on the part of the bank.

  • Report this Comment On April 20, 2010, at 10:46 PM, jackcrow wrote:

    Here's my six bits

    Keep Fannie and Freddie with three caveats

    1) The banks that originate the loan grade it on a debt scale AAA - BBB

    2)Hold the originating bank to the rating

    3)Freddie and Fannie must bundle like ratings

    This would let the market price the debt and stop the goofy fake AAA rating.

    On the banking side: The too big to fail crowd reorganizes into holding companies hard walling between commercial banking, investment banking, retail banking, insurance and broker/dealer.

    If one wholly owned subsidiary blows itself up too stinking bad, the holding company takes its hit and survives. If the holding company needs to sell quality assets because they let one subsidiary run wild, too stinking bad, it was their business decision let them eat their own cooking.

    I hate saying this but expand the SEC with a new division that oversees the rating agencies. Just like the accounting firms they have proven that they cannot maintain the ethical standards of their parents.

  • Report this Comment On April 20, 2010, at 11:17 PM, velodad wrote:

    Before discovering the MF I had a very Blue-Chip portfolio that did a fair job of growth and income since the late 70's. I invested the dividends in places other than the stock market.

    My method of diversifying included: real estate, various collectibles and a few other products. They have all grown fairly well over the years, but do require management, storage and some maintenance expenses.

    In 1995 I discovered a conservative commodities investing method coined, "Scale Trading" by Bob West the author of the book titled.. You Can't Loose Trading Commodities. I subsequently subscribed to the author's newsletter, The Scale Trader and did well until I got into silver and gold trading.

    Silver proved to be more supply/demand responsive due to it's large industrial uses, gold prices on the other-hand have a predominant but understated political component. At that time the EU was forming and gold values were manipulated like crazy by many forces other than Mr. Market.

    I got beat-up pretty badly in gold futures, because I was naive about the back-room, front-room, side-room, smoke-filled and all the other way-less than transparent manipulations going on.

    Regulation be damned,, countries, regions, miners, institutions, and individuals and others, use gold as a football and a sledge-hammer and a gun to the heads of each other for political.. which ultimately results in financial control. I was in shark-infested waters without a clue.

    I tell all this because the lesson learned has effected many of my investing decisions for nearly 2 decades. Any company or sector that values in $billions, makes and breaks the rules, as-needed using all the political and financial power they have bought and paid for. This is another argument for small- caps.

    I bought DOW (pretty cheap) in early 2009 while it was facing lawsuits and fines possibly amounting to millions, contrary to most advise. A few $million is chump-change to a multi-billion dollar corporation. As the MF advised... this was just a part of the cost of doing business.. this season will (and did) pass.

    The biggest, (name a billion dollar entity) will continue to navigate through rough seas with the overt or covert help of the government, because upper federal politicians are bought and culled to function as corporate collateral assets to make sure business ultimately succeeds.

    It was a cowboy named Will Rodgers that said, " We have the very best government money can buy" and that was some 80 years ago.

  • Report this Comment On April 20, 2010, at 11:26 PM, DBrown7 wrote:

    Wouldn't we be better off letting the Nevada Gaming Commission regulate synthetic CDO's and credit default swaps rather than the SEC? They are much more informed on the business of gaming. ;)

  • Report this Comment On April 21, 2010, at 10:27 AM, sagesfool wrote:

    Re-initiate the up-tick rule which Bush's regime removed and exacerbated if not accelerated the financial melt-down once the market started to free-fall off the cliff. Who said his administration didn't favour the street?!

  • Report this Comment On April 23, 2010, at 2:08 PM, dhuddle wrote:

    Great article Matt. I agree. Your points are well made.

    To , rhutmacher : as Matt said above, the problem that if these huge banks fail they will cause huge problems to the economy. I haven't seen anyone who is really informed say otherwise, so I have to believe it is true. The reason for most regulations is to prevent one person or company causing problems to lots of others. Speed limits are an example - if we didn't have them there would be idiots going 120 mph on the interstate.

    To ARJTurgot : What are your recommendations?

    To xetn : Is there a nation in the world that has your utopian "free market". The only one I know of is Somalia. Give that a try and let us know how it works. Seriously, most regulations came about for a reason. Glass-Steagall is a good example, and along with it FDIC insurance. The problem was that we abolished the regulations but kept the government guarantee. Without regulations a huge amount of time would be wasted checking everything out and people would be constantly getting ripped off and going to court. Great for the lawyers. It is easy to rant and talk about how great things would be, but give us some specifics about what you would abolish. For example, I would abolish patents on drugs necessary to keep people alive and require insurance companies to reimburse for drugs bought in Canada - do you agree with that? The drug companies use patents to charge exorbitant prices for drugs people require to stay alive, and lobby so we can't buy drugs from other countries. I would abolish protection of endangered species. Would you agree with that?

    To , penchymd : I believe Fannie and Freddie contributed, but don't see facts or any unbiased expert saying they "caused this mess" Frankly, I think that is a Red Herring thrown out by the Ayn Rand followers who want to blame everything on government. My understanding is that the problem was the huge increase in subprime mortgage backed securities which increased from an average 6% of historic originations to 18% in 2004, 26% in 2005 and 27% in 2006 (See Tilson “More Mortgage Meltdown”, 2009), That volume only occurred because of Wall Street. Derivatives, ratings agencies and shady mortgage brokers who weren't regulated all contributed. I agree with eliminating Fannie and Freddie, by the way.

    To those who don't know: Ayn Rand's real name was Alisa Rosenbaum. She was a Russian immigrant and a screen writer, an atheist and oposed public education. She was Alan Greenspan's mentor. She was bitter because the Bolsheviks seized her parents property. I don't think she ever had any experience running a business. Where would this country be without God and public education? People have latched onto her "philosophy" like a religion and follow it based on faith and not reason.

  • Report this Comment On April 23, 2010, at 2:32 PM, dhuddle wrote:

    Great article Matt. I agree. Your points are well made.

    To , rhutmacher : as Matt said above, the problem that if these huge banks fail they will cause huge problems to the economy. I haven't seen anyone who is really informed say otherwise, so I have to believe it is true. The reason for most regulations is to prevent one person or company causing problems to lots of others. Speed linits are an example - if we didn't have them there would be idiots going 120 mph on the interstate.

    To ARJTurgot : What are your recommendations?

    To xetn : Is there a nation in the world that has your utopian "free market". The only one I know of is Somalia. Give that a try and let us know how it works. Seriously, most regulations came about for a reason. Glass-Steagall is a good example, and along with it FDIC insurance. The problem was that we abolished the regulations but kept the government guarantee. Without regulations a huge amount of time would be wasted checking everything out and people would be constantly getting ripped off and going to court. Great for the lawyers. It is easy to rant and talk about how great things would be, but give us some specifics about what you would abolish. For example, I would abolish patents on drugs necessary to keep people alive and require insurance companies to reimburse for drugs bought in Canada - do you agree with that? The drug companies use patents to charge exorbitant prices for drugs people require to stay alive, and lobby so we can't buy drugs from other countries. I would abolish protection of endangered species. Would you agree with that?

    To , penchymd : I believe Fannie and Freddie contributed, but don't see facts or any unbiased expert saying they "caused this mess" Frankly, I think that is a Red Herring thrown out by the Ayn Rand followers who want to blame everything on government. My understanding is that the problem was the huge increase in subprime mortgage backed securities which increased from an average 6% of historic originations to 18% in 2004, 26% in 2005 and 27% in 2006 (See Tilson “More Mortgage Meltdown”, 2009), That volume only occurred because of Wall Street. Derivatives, ratings agencies and shady mortgage brokers who weren't regulated all contributed. I agree with eliminating Fannie and Freddie, by the way.

    To those who don't know: Ayn Rand's real name was Alisa Rosenbaum. She was a Russian immigrant and a screen writer, an atheist and opposed public education. She was Alan Greenspan's mentor. She was bitter because the Bolsheviks seized her parents property. I don't think she ever had any experience running a business. Where would this country be without God and public education? People have latched onto her "philosophy" like a religion and follow it based on faith and not reason.

  • Report this Comment On April 23, 2010, at 6:05 PM, brightmanly wrote:

    I think these are exceptionally good solutions. And I wish we had a King for just ONE DAY that could put them in place before he lost his power at the stroke of midnight.

    But the influence peddlers and wrong headedness (or brainwashed headedness) in our congressional halls of power, mixed with being a republic, may not bring many of these solutions to the light of day. For every argument someone has the right to make the counter influencing argument. Even if they are full of it.

    On top of it, those who would be resistant to the reforms would have to be dragged kicking and screaming into the 21st century to implement them.

    I love democracy. But it drives me crazy. I fantasize about having one week of Chinese Style rule with all the brilliant ideas implemented in a week irrefutably.

    Yes. A silly fantasy, with all sorts of unintended consequences...but let me have it.

  • Report this Comment On April 23, 2010, at 8:46 PM, jwaymoo wrote:

    Recommended reading: "13 Bankers: The Wall Street Takeover and th Next Financial Meltdown" by Johnson & Kwak, just published in the past month. It is authoritative (Simon Johnson is an Economics PhD at MIT), yet very easy to read with excellent explanations of credit default swaps, etc. Matt must have read it before writing this article.

  • Report this Comment On April 24, 2010, at 11:12 PM, rosesalive wrote:

    When the Glass-Stegall act was not renewed it allowed the banks to deregulate. Then the bigger banks swallowed up the little ones that couldn't compete. Thats how we got to big to fail. They need to be reigned in somehow. I agree with this article.

  • Report this Comment On April 27, 2010, at 4:22 PM, mpp100 wrote:

    I would add a stipulation that changes the tax-advantaged status of hedge fund managers. They need to pay regular old income tax like the rest of us vice the 15% capital gains rate.

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