What do you think?
It will be hard to reverse financial liberalization, but its negative side effects – including greater systemic risk – require a series of reforms.
First, more information and transparency about complex assets and who is holding them are needed.
Second, complex instruments should be traded on exchanges rather than on over-the-counter markets, and they should be standardized so that liquid secondary markets for them can arise.
Third, we need better supervision and regulation of the financial system, including regulation of opaque or highly leveraged financial institutions such as hedge funds and even sovereign wealth funds.
Fourth, the role of rating agencies needs to be rethought, with more regulation and competition introduced. Finally, liquidity risk should be properly assessed in risk management models, and both banks and other financial institutions should better price and manage such risk; most financial crises are triggered by maturity mismatches.
“…most financial crises are triggered by maturity mismatches.” That’s an interesting point to emphasize.
“…the role of rating agencies needs to be rethought, with more regulation…introduced.” This was probably the biggest problem (other than the utter greed to begin with) in the lead-up to the crash because Wall Street investment bankers would not have been able to sell their Mortgage-Backed Securities (MBS’s) and Collateralized Debt Obligations (CDO’s) containing all the toxic loans. It just would have brought the whole scheme to a grinding halt long before the housing bubble could have grown enough to sink the global economy upon bursting the way it did.
Credit Default Swaps (CDS’s) had a great deal to do with the crash too. They were supposed to cover bad loans. They didn’t. They couldn’t the way they were designed and being way overused and oversold/bought. The government and regulatory bodies have been planning to do something about it. Maybe Nouriel Roubini will chime in. Maybe he already has but should now do it again:
The OCC, Board, FDIC, FCA, and FHFA (the Agencies) are requesting comment on a proposal to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants for which one of the Agencies is the prudential regulator. The proposed rule takes into account the relative risk of a covered swap entity’s activities in establishing both (i) the minimum amount of initial and variation margin that it must collect from its counterparties and (ii) the frequency with which a covered swap entity must calculate and collect variation margin from its counterparty. It also requires a covered swap entity to comply with regulatory capital rules already made applicable to that covered swap entity as part of its prudential regulatory regime (76 FR 27564). On June 24, 2011, the Agencies extended the public comment period until July 11, 2011 (76 FR 37029). On July 6, 2012, BCBS and IOSCO published a Consultative Document entitled “Margin requirements for non-centrally-cleared derivatives.” On October 2, 2012, the Agencies reopened the comment period until November 26, 2012 to allow comment on the Consultative Document and Proposed Rule concurrently.