Economic/Market Reform: What Should the Rules Be?

[Astronuc]

The US, EU and various other nations and international entities are all weighing and considering economic or market reforms to prevent the kind of financial crisis in which the world financial system finds itself.

What should the reforms be? What are reasonable regulations?


Blackstone CEO urges common oversight: report
http://www.reuters.com/article/ousiv/idUSTRE4A33RD20081104

NEW YORK (Reuters) - Blackstone Group LP (BX.N) Chief Executive Stephen Schwarzman called for greater common oversight of the world's financial system to help extricate it from "the worst financial crisis in recent memory."

In a Tuesday opinion piece in The Wall Street Journal, the head of the big private equity firm said financial systems should be less dependent on rules, and that adherence to rules can get in the way of keeping up with and addressing developing issues in fast-moving markets.

Schwarzman in particular argued that the Sarbanes-Oxley governance act, passed after Enron Corp's 2001 collapse, "has made a fetish of compliance with complex regulations as a substitute for good judgment. This has not made American corporations any more stable or profitable, but it has damaged our competitiveness and weakened our domestic financial markets."

Schwarzman offered a seven-step plan to underlie any system of global financial regulation. The steps include:
. . . .

Should everyone play by the same rules? What should those rules be?


Washington Is the Problem
FedEx's CEO on McCain, free trade and the tax bias against capital-intensive industries.
http://online.wsj.com/article/SB122488966230768509.html

 

[misgfool]

What should the reforms be? What are reasonable regulations?
Should everyone play by the same rules? What should those rules be?

Blackstone has good points. No regulation so that banks can still do what ever the please, but full transparency of all financial instruments, accounts and risks. If that can't be done, then ban the instrument. Then with this data markets decide whether to take a risk and invest.

 

[russ_watters]

I'm not sure I'd go that far, but I agree that transparency is a real key. But so is simplicity. Part of what caused the current situation is the complexity of the derivatives made it difficult to evaluate them. My sister is a high level fixed income security analyst for a major bank and she and her bank passed on these particular securities based largely on their complexity.

 

[Dale]

Excellent article Astronuc. By the way, did you really say that people making over $250k don't work hard for it? I admit that I only know a few, but each one of them that I do know work insane hours, just as a normal part of their routine.

I favor transparency, not just in the financial sector, but as a general principle for getting good results without overly restricting freedom. When people know that they are being watched they generally behave well, this includes businessmen, politicians, and even my kids.

 

[chasely]

Excellent article Astronuc. By the way, did you really say that people making over $250k don't work hard for it? I admit that I only know a few, but each one of them that I do know work insane hours, just as a normal part of their routine.

I believe it was meant to mean that those who make 250k+ are usually higher up in the company, and therefore make money from work of those underneath them. It's not that they don't work hard, but they don't necessarily work 5 times harder than those making 50k. They have put in the time or invested their intellect that allows them to make what they do. I think we could all probably agree that a construction worker who works 12 hours a day ends up going home a little more tired or beaten than the CEO of the company he works for.

As for the original question...I think transparency is key. But perhaps the most important thing is educating the public about finances. When we spend more than we save, we are just asking for a lot of trouble further down the road. When the average American loses sleep because of a $1,000 car repair, it's time to take another look at our spending habits.

 

[Astronuc]

By the way, did you really say that people making over $250k don't work hard for it? I admit that I only know a few, but each one of them that I do know work insane hours, just as a normal part of their routine.

I made a careless and incomplete (unqualified) statement, and Russ ran with it. I set myself up for that one. Oh -well.

I should have said that I doubt many people who earn more than $250K/yr work harder than those who earn less. I know several people who earn more than $250K, and they do work hard, e.g. a family member who is a cardiac anesthesiologist who frequently works back-to-back surgeries. Those folks who work like that do it because they are dedicated, they don't whine, they don't fret about taxes, and they do contribute to charities.

On the other hand, I know some who earn over $250K, including a family member who has a trust/inheritance (but doesn't work), and frets somewhat about paying a little extra in taxes, despite having a house paid off. And I was reflecting on those folk, and the folks on Wall Street, where the incomes are well over $250K, even with mediocre performance. And some complain they still don't make enough, or they fret about taxes.

In contrast, I know of an immigrant who my wife tutored in English. He worked 3 part-time jobs and his wife work 2-3 part-time jobs (both without benefits like health insurance and pension/retirement), and lived a rundown apartment with 3 kids until he saved up a enough to buy a house. He was an undocumented alien for more than 10 years before he applied under the amnesty program, and he's now a US citizen. He was grateful for his opportunity, happy to pay taxes, and never complained that he didn't make enough.

I'll have to live with Russ's signature and take my lumps.

 

[nuby]

I think the first step is political reform, there's too much government manipulation and control coming from large corporations/special interest groups. When these groups are in control the problems start, imo.. Wasn't the high price of oil one of the factors that started our recession? How many oil/energy guys are in the Bush administration?

People who are wealthy (make well over 250k), and don't "work" hard for their money, they make their money work hard for them. If you have a regular job that pays 250k/yr, you're probably working extremely hard to make someone else rich (who does a lot less work).

 

[Art]

I'll have to live with Russ's signature and take my lumps.

Look on the bright side. With some of the rEdiculous clangers Russ drops it wouldn't be hard to respond in kind

 

[Astronuc]

I think the first step is political reform, there's too much government manipulation and control coming from large corporations/special interest groups. When these groups are in control the problems start, imo.. Wasn't the high price of oil one of the factors that started our recession? How many oil/energy guys are in the Bush administration?

High energy prices are one of several factors.

The economy has been over-leveraged for some time - federal debt, corporate debt, commercial debt (mortgages (particularly sub-prime mortgages), car loans, education loans, credit card debt, . . .) and there has been an increasingly heavy reliance on foreign investment.

The sudden increase in mortgage defaults (some probably a consequence of higher energy and consumer prices), which lead to large losses in securities supported by those mortgages and complex financial instruments (credit default swaps and other derivatives), combined with rising unemployment, increase in bankruptcies, . . . . created a perfect storm.

There are other factors such as the high proportion of the economy based on consumption and services, which is tenuous in economic downturns, probably exacerbated the situation.

 

[Art]

High energy prices are one of several factors.

The economy has been over-leveraged for some time - federal debt, corporate debt, commercial debt (mortgages (particularly sub-prime mortgages), car loans, education loans, credit card debt, . . .) and there has been an increasingly heavy reliance on foreign investment.

The sudden increase in mortgage defaults (some probably a consequence of higher energy and consumer prices), which lead to large losses in securities supported by those mortgages and complex financial instruments (credit default swaps and other derivatives), combined with rising unemployment, increase in bankruptcies, . . . . created a perfect storm.

There are other factors such as the high proportion of the economy based on consumption and services, which is tenuous in economic downturns, probably exacerbated the situation.

I think the next blow to America's economy will come from Europe. The EU's expansion toward the East has been financed by huge unsecured loans to countries who no longer have the means to pay them back and so as Europe is driven into recession America's one remaining strong card, it's export markets, will fold.