When one need not worry about enforcement, practicality, competing interests or the effect on political success, it's delightfully easy to suggest legislative remedies. And thus the One With Everything Financial Reform Act of 2010:
- Banks must be privately held. Several years ago the bank where I keep checking and savings accounts went public. I actually found this confusing from a consumer perspective, as I wondered for many years whether I would have been smarter to invest in the bank's stock rather than be an account holder. As it happened, the stock of this particular bank opened at $10, made it to the mid-thirties and today lives in equity skid row at well under a dollar. (And no, it's not on the FDIC watch list.) I'm happy at this point to have kept my money where it was, but it's gotten me to wondering about whether it's wise to allow investors to even have such a choice. Ordinarily businesses go public because the benefits of doing so outweigh the benefits of borrowing money for investing and expanding. I am unclear what need any bank would have for substantial investment capital to run their business--all they really need is software and storefronts. Original investors/founders of a business certainly like to cash out from going public, but in fact there are many other suitable ways to realize gain from and share ownership of a business. In fact what going public meant for banks meant was access to substantial amounts of capital for which they were far less accountable. It has meant they have balance sheets with numbers far in excess of deposits/loans and it has meant an irrestible temptation to invest speculatively in the chase for ever better margins. The repeal of Glass-Steagall certainly did not help, as conventional and investment banking could once again be joined in single entities. There are plenty of mechanisms for investing in risky undertakings. We are suggesting however that the banking sector should be split (again) into a staid sector and a not-staid sector, kept apart and regulated quite differently one from the other. Neither sector however should be allowed to raise funds through public stock offerings. In the end, customers will keep a better watch on their money than shareholders.
- Increase margin requirements on all investments. One can only assume that the delusion that everything is different this time was so compelling and so widespread as to make all previous instances of leveraged bubbles not relevant to the present. When the potential losses from leveraged instruments exceeded the global GDP in 2007 though, it ought to have given pause (and ultimately gave much more than that.) Borrowing to invest is a valid tool in some situations and immensely appealing, but so fraught with danger as to require about the same level of oversight as the sale of dynamite.
- Reduce the impact of the financial sector. In the last few years the financial sector (FIRE) has, by many estimates, accounted for over 20% of GDP, significantly more than its historic portion of under 5%. (And yes, there is probably justification for treating these numbers with caution.) The reasons this happened and the implications of it seem to be complex, but 20% seems way too much, certainly way too much for a sector whose mission is essentially to funnel surplus capital to places where money is needed for productive investment. It suggests (as we argued in a previous post) that no one can state with certainty what the next transformative wave in this economy will be or even whether there will be one. But whether we have a mature economy quietly optimizing what it has already accomplished or one that is moving rapidly to deploy major changes does not require a sector that does not produce actual wealth. (We're not suggesting that the contribution of the financial sector in collecting capital, managing risk and helping the marketplace work more efficiently is unneeded, only that it reworks wealth created by others.)