Right now the G20 is meeting in Europe. The subject under discussion is global economic catastrophe.
- How did we get here?
- How do we get out?
- How do we ensure that this doesn't happen again?
Whilst the commies are beating down the doors at RBS headquarters in London, the leaders of the civilized world are discussing these three subjects. Most import of these issues is #3: How the hell do we ensure that this doesn't happen again. The Euros are particularly sharp on this point. They want a uniform framework of regulation--world wide--that will prevent the banking system from ever creating this kind of meltdown again.
I am going to surprise some conservatives who say "let come what may" but I favor these proposals. We need some ground rules to ensure that these shenanigans do not occur again.
1. Insurance is insurance. Credit default swaps and other future derivatives are forms of insurance. They must be backed by ready reserves and Risk-Pools.
2. Insurance companies are regulated by Federal Insurance authorities
3. Standard & Poors as well as Moody's need to be prosecuted relentlessly and driven out of business. Future dealers in this business should be forced to put their money where their mouth is. If they rate bonds as double and triple-A they should be forced to buy these bonds at full market price, without any assistance, and carry them to full maturity.
4. Income documentation needs to be supplied, tested and verified with the IRS and other sources, under pain of Criminal Fraud charges.
5. Standards for mortgage terms must be set, focusing on fixed rate loans, and drawing sharp limits on ARMs. Adjustments of interest must be locked to the prime. The formula would be Prime + X, where X is a simple integer. In particular, Federal standards must limit ARM sales to those who can afford the full cost of the loan after adjustment, not just the teaser rate.
6. 10% or higher rates of interest should be defined as usury, period. I am speaking of all forms of interest on all forms of loans. We will effectively cap all types of interest at 9.999%. Lenders will complain that this will restrict the supply of M3. Not to worry. That is the effect we wish to have. We cannot allow the massive and unrestrained use of leverage we have seen in years past.
7. Sharp limitations must be placed on Loan Origination for distribution. No subprime or ARM loans should vendible in securitized form. Mortgage institutions must bear the risk of subprime and explosive ARM loans, and carry them to full maturity. Lenders will complain that nobody will offer ARM loans under such terms. That is not a bad thing.
8. We need new Anti-Trust laws. The old framework is badly out of date. Old law makers were concerned about what happens when there is just one or a few competitors in a market. In a world-wide market, this is no longer an issue. There is always another major competitor across the boarder somewhere. The issue now is sheer size and scale, not competition. Consider the Royal Bank of Scotland. Hardly anything resembling a monopoly, RBS has a balance sheet twice the size of the British economy. Say what...??? Yep, that is right, RBS has a balance sheet twice as large as the GDP of Great Britain. It is not even close to being a monopoly. There are plenty of other banks in London, not least of whom is HSBC. This means just one non-monopoly company can sink the entire nation. It also means that it is impossible for the British to bail out RBS. How can you not view this information without a rising sense of alarm? It is amazing how unsafe this condition sounds. Can any corp be allowed to be larger and more powerful than the nation which hosts it? Every country can and will become a banana republic under these terms. We can no longer afford to have firms larger than nations, and--ergo--too big to fail. The danger to the nation and to the people is too great. Anti-Trust laws need to be crafted to limit absolute and relative size of firms.
