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Roubini's 10 part prescription for a more stable financial future

Finance Blogger: Ian Fraser Ian Fraser

Nouriel Roubini, the New York-based economist who can justly claim to having foreseen the crisis, has proposed a comprehensive list of 10 reforms to limit the chances of such a cataclysm occurring again.

The proposals, outlined in Roubini's new book, Crisis Economics: A Crash Course in the Future of Finance, co-authored by Stephen Mihm and published yesterday by Penguin, include an overhaul of securitization, a ban on CDOs, the shifting all over-the-counter derivatives trading onto regulated exchanges, a changed remit for central banks, and a strengthened International Monetary Fund.

Roubini, a former adviser to President Bill Clinton and professor of economics at New York University Stern School of Business, outlined the remedies in a chapter published by the Daily Telegraph. Here are nine ingedients of Roubini's marvellous medicine.

  1. Bankers’ compensation should be realigned, so it marries with the interests of long-term shareholders.

  2. Securitizations (bundles of loans) must be more heavily regulated, more transparent, and the securitization process more scrutinized. “The problem with originate-and-distribute lies less with the distribution than with the origination. What matters most is the creditworthiness of the loans issued in the first place."

  3. CDOs should be heavily regulated if not banned outright. “In their present incarnation ... they don’t transfer risk so much as mask it under the cover of esoteric and ultimately misleading risk-management strategies." Roubini said the curious career of CDOs brings to mind another, less celebrated acronym: GIGO, or “garbage in, garbage out”.

  4. The over-the-counter derivatives market needs to be comprehensively reformed and forced onto central clearing houses and exchanges and registered in databases, with usage of OTC derivatives appropriately restricted. The regulation of derivatives should be consolidated under a single regulator.

  5. Credit rating agencies must be “collared” and forced to mend their ways, with greater competition also introduced to the sector. “That they now derive their revenue from the firms they rate has created a massive conflicts of interest.”

  6. Institutions deemed “too big to fail” including Goldman Sachs and Citigroup should be broken up and the Glass-Steagall Act reenacted and updated to reflect the challenges posed by the shadow banking system.

  7. New regulations should not be limited to a select class of firms but imposed across the board, ito prevent financial intermediation from moving to smaller, less-regulated firms.

  8. Regulation should be consolidated into fewer, more powerful regulators and regulators should be compensated in a manner befitting their role in safeguarding financial security.

  9. Central banks should proactively use monetary policy and credit policy to prevent the inflation of asset price bubbles

  10. The IMF should be strengthened so it has the power to correct global imbalances as well as the power to supply the makings of a new international reserve currency.

Roubini concluded by saying: “If we strengthen the levees that surround our financial system, we can weather crises in the coming years. Though the waters may rise, we will remain dry. But if we fail to prepare for the inevitable hurricanes—if we delude ourselves, thinking that our antiquated defences will never be breached again—we face the prospect of many future floods.”

Further reading on banking reform

Tags: asset price bubbles , banking , derivatives , financial crisis , Glass-Steagall Act , global imbalances , IMF , Nouriel Roubini , regulation
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