In another sign that Henry Paulson and Ben Bernanke have failed, Michael Lewis and David Einhorn have set out a strategy for the Obama Administration to pursue in order to restore confidence in the market. The End of the Financial World as We Know Itis a scathing look at the behavior of regulators and government officials, Paulson in particular. Lewis and Einhorn also make a series of damning arguments that Wall Street has corrupted every aspect of its watchdogs, turning Treasury and the SEC into Quislings. (Tip of the hat to Made to Stick blog, which called this “the first must-read article of 2009,” prompting me to spend the 25 minutes or so needed to read it.)
Thus part two of their essay, in which Lewis and Einhorn outline How to repair a broken financial world. Almost all the steps seem like common sense:
- Separate regulatory strategy from the stock market. Nothing long-term can get done by playing to the markets, except guaranteeing that the markets will be unhappy in the long-term.
- Kill the ratings system. A no-brainer. Who could trust Moody’s or S&P now?
- Regulate credit-default swaps. Another no-brainer.
- Set new capital requirements for banks. Basel II-style self-regulation didn’t work. Let’s set some real standards. This seems to ignore the problem of risk discounts used to value assets, raised by Brad DeLong.
- Too big to fail? Break it up. That would be a refreshing change from the current strategy of creating even more monstrous banks.
- Ban SEC employees from taking high-paying jobs on Wall Street. Simple solution to the problem of the prisoners running the jail. Only it’s hard to see Congress taking an action that might curb lobbying by former officials.
- Hire Harry Markopolos (or someone like him) to enforce regulations. Plenty of ex-Wall Street quants no longer need money to work and might find it as interesting to regulate the Street. Whether Markopolos is one of those is besides the point. The talent is there. Use it.
What do you think, BNET? Are these the answers? What else is needed?
