My analysis offers some worthwhile clues to the kind of regulatory reform that is needed. Firstand foremost, since markets are bubble-prone, the financial authorities have to accept responsibilityfor preventing bubbles from growing too big. Alan Greenspan and others have expressly refusedto accept that responsibility. If markets can’t recognize bubbles, Greenspan asserted, neithercan regulators—and he was right. Nevertheless, the financial authorities have to accept theassignment, knowing full well that they will not be able to meet it without making mistakes.
They will, however, have the benefit of receiving feedback from the markets, which will tell themwhether they have done too much or too little. They can then correct their mistakes.
Second, in order to control asset bubbles it is not enough to control the money supply; youmust also control the availability of credit. This cannot be done by using only monetary tools;you must also use credit controls. The best known tools are margin requirements and minimumcapital requirements. Currently they are fixed irrespective of the market’s mood, becausemarkets are not supposed to have moods. Yet they do, and the financial authorities need to varymargin and minimum capital requirements in order to control asset bubbles.
Regulators may also have to invent new tools or revive ones that have fallen into disuse.
For instance, in my early days in finance many years ago, central banks used to instructcommercial banks to limit their lending to a particular sector of the economy such as real estateor consumer loans because they felt that the sector was overheating. Market fundamentalistsconsider that crass interference with the market mechanism but they are wrong. When ourcentral banks used to do it we had no financial crises to speak of. The Chinese authoritiesdo it today, and they have much better control over their banking system. The deposits thatcommercial banks have to maintain at the central bank were increased 17 times during theboom, and when the authorities reversed course the banks obeyed them with alacrity.Or consider the internet boom. Alan Greenspan recognized it quite early when he spoke about“irrational exuberance” in 1996. But apart from his famous speech, he did nothing to avert it. He felt thatreducing the money supply would have been too blunt an instrument to use, and he was right. But hecould have asked the SEC to put a freeze on new share issues, because the internet boom was fueled byequity leveraging. He did not, because that would have violated his market fundamentalist beliefs.
Third, since markets are potentially unstable, there are systemic risks in addition to therisks affecting individual market participants. Participants may ignore these systemic risksin the belief that they can always dispose of their positions to someone else, but regulatorscannot ignore them because if too many participants are on the same side, positions cannot beliquidated without causing a discontinuity or a collapse. They have to monitor the positionsof participants in order to detect potential imbalances. That means that the positions of all majormarket participants, including hedge funds and sovereign wealth funds need to be monitored.
Certain derivatives, like credit default swaps and knockout options, are particularly proneto create hidden imbalances; therefore they must be regulated and, if appropriate, restricted orforbidden. The issuing of synthetic securities needs to be subject to regulatory approval, just asordinary securities are.
Fourth, we must recognize that financial markets evolve in a one-directional, non-reversiblemanner. The financial authorities, in carrying out their duty of preventing the system fromcollapsing, have extended an implicit guarantee to all institutions that are too big to fail. Now theycannot withdraw as long as there are institutions that are too big to fail. Therefore they must imposeregulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must useless leverage and accept various restrictions on how they invest the depositors’ money. Depositsshould not be used to finance proprietary trading. But regulators have to go even further. Theymust regulate the compensation packages of proprietary traders to ensure that risks and rewardsare properly aligned. This may push proprietary traders out of banks into hedge funds where theyproperly belong.
Just as oil tankers are compartmentalized in order to keep them stable, there oughtto be firewalls between different markets. It is probably impractical to separate investmentbanking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to beinternal compartments keeping proprietary trading in various markets separate from each other.
Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.
Finally, the Basel Accords made a mistake when they gave securities held by bankssubstantially lower risk ratings than regular loans: they ignored the systemic risks attachedto concentrated positions in securities. This was an important factor aggravating the crisis. Ithas to be corrected by raising the risk ratings of securities held by banks. That will probablydiscourage the securitization of loans.
All these measures will reduce the profitability and leverage of banks. This raises aninteresting question about timing. This is not the right time to enact permanent reforms. Thefinancial system and the economy are very far from equilibrium and they cannot be broughtback to near-equilibrium conditions by a straightforward corrective move, just as when a caris skidding you must first turn the wheel in the direction of the skid before you right the car.
鄂公網(wǎng)安備 42010302001612號(hào)