My CNBC interview on the President's financial regulatory reform plan

3 Responses to “My CNBC interview on the President's financial regulatory reform plan”

1. 

   Mike 19 June 2009 at 12:29 pm

   I would be interested in your thoughts about creating a systemic firewall with banks by using a modified version of Larry Kotlikoff’s Limited Purpose Banking idea to require Bank Holding Companies intermediation of demand deposits be 100% reserves held at the Fed in teasuries. This would eliminate the need for the FDIC since the treasury, working through the Fed, would be implicitly guaranteeing all bank demand deposits. If a bank over leverages and fails its demand deposits would be protected thereby truncating any potential for systemic risk that flows through the money supply. This would also eliminate the concern about too big to fail banks causing a systemic feedback through the money supply.

   Banks, after covering their costs and profits, would pass through earnings from the invested deposits to customers. Banks would be competing on their checking account services and return on those funds. In effect, they would be providing unlimited check writing on a money market mutual fund invested in treasuries. The Fed would execute monetary policy by open market operations and control over the duration of the reserves invested in treasuries of various maturities.

2. 

   Laurent Pacalin 23 June 2009 at 6:57 pm

   Wikipedia defines “financial systemic risk” as, “the risk of sudden collapse of an entire system or market…due to potentially catastrophic instability in that interlinked and interdependent system or market.” That’s a fine definition, but few of us need to look it up. It’s been nine months and counting since systemic risk erupted, and the global financial system is still tiptoeing around the smoking crater. As the worst recession of our lifetimes grinds on, institutions and governments are working feverishly to build strategic and regulatory protections against future systemic risk cataclysms.

   In my view, government regulators and financial executives will have the greatest chance of success in managing and mitigating systemic risk if they understand and act on three related lessons that are emerging from the trauma that began in the autumn of 2008:

   ? First, beneath the fearsome complexity that can obscure the working of markets, the value of all financial relationships is still defined by the quality of the underwriting – defining underwriting in the broadest possible sense. The old rules still rule: Know your borrower. Know your lender. It’s a simple concept, but the market environment in recent decades has made it harder and harder to execute. We must repair the markets in a way that enables 360-degree underwriting based on clear, transparent, trustworthy data and relationships.

   ? Second, of all the characteristics that define economic activity, connection is the most important. Institutions considered “too big to fail” are in reality “too connected to fail.” The web of interdependencies that girdles the globe, linking the boardrooms of Wall Street to the kitchen tables of Main Street, can be the economic system’s greatest vulnerability – as Nassim Taleb argues in The Black Swan – or its greatest strength. Job No. 1 for leaders of the world’s financial institutions and market-regulating bodies is to design the architecture of systemic connection to assure strength.

   ? Third, despite the enormity of the task facing us, there is a good place to start where we can gain swift traction, and that is with microdecisions – the innumerable individual economic decisions financial professionals and consumers make every day on a global basis. To be clear, I’m not talking about trivial mini-decisions. Microdecisions are the fundamental building blocks of the economic system on all levels. “This [financial] crisis started one mortgage at a time,” Dr. Elizabeth Warren, the Harvard Law School professor who chairs the Congressional oversight panel on government bailout spending, told The New York Times on June 18

   Laurent Pacalin
   CMO at FICO
   Co-Founder Clean Tech Open

3. 

   l 27 November 2009 at 3:56 am

   Admiring all the effort you put into your blog. I particular liked this post. Keep up the good work, Pearl Boyden @ L