Six Fixes for Wall Street: Regulate Sub-Prime Lending

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.

Regulating the non bank sub-prime lenders and mandating (and enforcing) lending standards This one is pretty self-explanatory and one few argue as a key reason for the sub-prime debacle.

Recent history shows that when left on their own, standards will dangerously cease to exist.  Stated income, no doc loans.  Yes we've all seen 60 Minutes.  But the real problem wasn't lax lending standards but a lack of market accountability in which the consequences of making bad loans or buying pools of bad loans were circumvented with cries of systemic risk.

Any thoughtful lending standards will be cautious, marginal and focus mainly on the loan process.  What these regulations shouldn't do is dictate the criteria upon which individuals are approved for loans.  That is, the government should regulate the process -- what documents I have to provide, what assets and liabilities I have to disclose, what credit history I have to account for, etc. -- but have no say in who does or who doesn't get loans. 

Governments are naturally inclined to overstep their boundaries.  Having bureaucrats acting as loan officers will ultimately  freeze out many responsible, well meaning  home owners and investors.

The goal of regulation shouldn't be to stop institutions -- or individuals for that matter -- from making poor decisions or poor investments.  You can't regulate stupidity.  Rather, it should be to contain the fallout from bad decision making.  Wall Street's cold shouldn't be Main Street's flu.