Real Financial Sector Reform

 

My blog, It Does Not Add Up, addresses fiscal and economic issues facing the United States at the present time.  I am concerned about our slow economic growth which deprives many middle- and lower-income workers of their proper share of our nation’s increasing prosperity.  I am also concerned about our large and rapidly increasing national debt which will create a huge cost burden on society when interest rates resume their normal historical levels.
Capture11Another critical problem, left over from the Great Recession of 2008 – 2009, is how to properly reform our financial system to avoid another meltdown as occurred in 2007 – 2008.  To me this is a more complex issue than slow growth and huge debt and therefore harder to figure out what to do about it.  I am always looking for new sources of information on this topic and feel that I have just discovered a good one.  It is a new book, “Five Easy Theses”, by James Stone, the founder and CEO of the Plymouth Rock Insurance Group and former chairman of the U.S. Commodity Futures Trading Commission (1979 – 1983).
According to Mr. Stone the Dodd-Frank Act of 2010 is too weak in certain respects and three additional reforms are badly needed to avoid a new crisis:

  • The scale and risk profile of large banks should be reduced by having the Federal Reserve impose progressively steeper capital requirements as they grow larger.
  • Hedge funds should be regulated like mutual funds under the Investment Company Act of 1940.
  • The leverage of derivative markets should be reduced decisively with meaningful reserve requirements (which do not net opposite positions to zero).

Mr. Stone emphasizes that he is offering “best” solutions, not constrained by political reality. The financial sector’s share of GDP is now at an all-time high of about 8%.  The enormous wealth enjoyed by those at the pinnacle of finance will make them powerful opponents of meaningful reform.
But it always helps to know in what direction we need to go.

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