Monday, March 15, 2010

Financial Regulatory Reform

As far as I'm concerned the financial meltdown in the U.S. which nearly brought down the global financial system was the result of five factors: 1) U.S. bank deregulation by congress, 2) a political push to increase home ownership, 3) ridiculous mortgage standards, 4) low interest rates, and 5) a Wall Street culture that embraced compensation structures that rewarded too much risk.  In other words: 1) policy failure, 2) policy failure, 3) regulatory failure, 4) policy failure, and 5) greed.  So, despite my urge to round up all the Wall Street wunderkinds who invented, sold and re-sold undecipherable exotic derivative products for their personal gain into paddy-wagons to be locked up until they fork over every cent (I consider them guilty until proven innocent), it probably wouldn't do much practical good.  And unfortunately policy failures based on political ideology will continue to happen - the nature of the beast, so to speak.  Which leaves us the regulatory reform of mortgage standards and Wall Street compensation to deal with - although the SEC could also use a good swift kick in the ass.  The trick going forward, as I see it, is to reform regulations without driving honest financial innovation offshore (read Singapore).