While the president and congress are prescribing placebos for Wall Street ailments, Barry Ritholtz, CEO of Fusion IQ and author of Bailout Nation, is proposing six hard medicines for financial regulation reform. I offer my thoughts on each.
Overturning the so-called Bear Stearns rule allowing leverage beyond 12 to 1 The SEC’s 2004 rule change, which eliminated some leverage restrictions on investment banks in favor of capital requirements by type of asset was a mistake, saysRitholtz. “Without overturning that, give us 5-10 years, we’ll be right back where we started.”
In a capitalist utopia, excessive leverage would be regulated by the market. In the real world it wasn't, and leverage ratios upwards of 40-1 became commonplace. Other regulations on this list, in conjunction with capital requirements, do the heavy work of decreasing the systemic risk of excessive leverage.
However, the government would be well suited to reevaluate policies that incentivize leverage from both individuals and corporations.