After explaining why today’s large financial firms are impossible to regulate, dangerous to own stock in and effectively impossible to understand, even for their own managers, Vincent Reinhart suggests a solution: Keep It Simple.
In “Simple Rules for a Complex Financial World” he suggests:
“Simplify accounting rules and the tax code. Make the components of financial firms modular so that the whole can be split up into basic parts at a time of stress. With simple rules that define lines more sharply, our federal regulators will find enforcement much easier. If firms are more transparent, official supervision will be reinforced by the new-found discipline exercised by shareholders and creditors. And with fewer places for self-interest to hide, employees will be more accountable in their efforts to preserve the longer-term value of their firms.”
“Being bigger or more complicated or having better lobbyists will not covey an advantage in a world of clear lines, strict enforcement, and no exceptions. We have lived in a world of fine print and sharp lawyers and look where that got us. We are ready for change.”
Unfortunately, clarity and elegant simplicity are not much favored in Washington, where public policy is largely shaped by a complex maze of private deals intentionally made complex and unclear for the benefit of well connected self interested parties.
But Reinhart’s suggestions are absolutely essential in the long term if we ever want to restore anything resembling a fair or rational financial marketplace.
There is an even better near term solution than making the components of large financial firms clearly modular and transparent so those firms can be more readily regulated and “split up into basic parts at a time of stress”. It is also a better solution than bailing out the large banks with TARP, TALP and all manners of direct subsidy or the backstopping of their huge and unreasonable risks by the taxpayers. Regulators should acknowledge that the “too big to fail” banks are all effectively insolvent and use the current banking regulations that are being ignored to break them up into rational manageable parts – right now.