Why isn't the appropriate regulatory model that of phone companies, which also have network externalities (rather than production economies of scale), but are required to act as common (and mere) carriers?

I'm reading his book, and finding it surprisingly agreeable.

"The recent financial crisis was an accident, a “perfect storm” fueled by an unforeseeable confluence of events that unfortunately combined to bring down the global financial systems. And policy makers? They did everything they could, given their limited authority. It was all a terrible, unavoidable accident. Or at least this is the story told and retold by a chorus of luminaries that includes Timothy Geithner, Henry Paulson, Robert Rubin, Ben Bernanke, and Alan Greenspan.

In Guardians of Finance, economists James Barth, Gerard Caprio, and Ross Levine argue that the financial meltdown of 2007 to 2009 was no accident; it was negligent homicide. They show that senior regulatory officials around the world knew or should have known that their policies were destabilizing the global financial system, had years to process the evidence that risks were rising, had the authority to change their policies--and yet chose not to act until the crisis had fully emerged.

The current system, the authors write, is simply not designed to make policy choices on behalf of the public. It is virtually impossible for the public and its elected officials to obtain informed and impartial assessment of financial regulation and to hold regulators accountable. Barth, Caprio, and Levine propose a reform to counter this systemic failure: the establishment of a “Sentinel” to provide an informed, expert, and independent assessment of financial regulation. Its sole power would be to demand information and to evaluate it from the perspective of the public--rather than that of the financial industry, the regulators, or politicians."

--- I quite fail to see how this would solve the problem.

Errr, rather obvious, yes?

"For the kind of profession where a practitioner is handling money or valuables for not-necessarily-sophisticated customers, like bail-bondsmen, insurance brokers, real estate brokers or even the auctioneers he mentions, there's a huge potential for fraud that realistically can't be addressed by generic law enforcement, even if the money that's now spent on licensing were redirected to prosecutors. ..."

"Bhide warns us that modern finance is on a collision course with the true heart of capitalism: innovation and entrepreneurship. Deepening this disconnect is the growing complexity of banks, which habitually fail to hold bankers accountable for their mistakes, while blatantly subverting the tough banking rules established in the 1930s. As Bhide makes clear, the erosion of these rules displaced traditional relationship-based lending in favor of liquid, anonymous securities, which ultimately succeeded in depriving large banks (and other publicly traded companies) of oversight by investors with first-hand knowledge of the business or its managers. Identifying this lack of monitoring as a fatal flaw that destabilized the economy and helped trigger the financial crisis, Bhide pushes for tough, straightforward limits on the activities of commercial banks and financial instruments such as money market funds."

ETA: review: http://bactra.org/reviews/bhide-contra-finance.html

UK's chief bank regulator: "The banking industry is ... a pollutant. Systemic risk is a noxious by-product. Banking benefits those producing and consuming financial services – the private benefits for bank employees, depositors, borrowers and investors. But it also risks endangering innocent bystanders within the wider economy – the social costs to the general public from banking crises."

Indeed.

That'd be Sen. Sheldon Whitehouse (D-RI), not a misprint for "White House".

J'accuse! "He allowed the illegal creation of Citigroup with a nod and a wink, knowing that Gramm-Leach-Bliley was just around the corner and would make Citigroup legal in retrospect. He then collected his just rewards in the form of $126 million in pay from Citi, for a job which even Weisberg admits involved no managerial responsibility." Plus, all the stuff about derivative regulation. May I add that if I am ever appointed treasury secretary, I would be willing to engage in comparable acts for a mere $20 million (in 2010 dollars)?

As every school-child knows, firms in a competitive market earn no profit over their cost of capital (and paying for their employees' time, including the entrepreneurs' if any). Deregulation of banking and finance had many effects, but creating a competitive environment was very evidently not one of them.

Huge PDF. Looks interesting.

"So there are a lot of people out there who think that we need to kill the moral hazard of having your savings account insured. Grandma has $12,000 in her savings account, and doesn’t worry about whether or not the bank is solvent – so let’s force her to worry by removing the FDIC protection. This worrying will result in her providing discipline to her bank on their risk. ... How will grandma know what to do? ... I know the simple way you do it, some techniques that I’ve had some training in: You place out the payment structures using monte-carlo simulations with lognormal random walks; you take a metric of correlation in the market, perhaps in a gaussian copula structure and use that to run correlations at each step between the instruments; you take the distribution you generate and apply a “value-at-risk” logic to it, looking at some piece of the tail distribution.
... a 16-year old who wants to open a savings account for his part-time job will need to know these techniques..."

I am happy to see Krugman's synopsis of the crisis agrees with my half-assed speculations.

Hear, hear.

Ans.: the market takes care of it! (More seriously, this is a big issue with trying to evaluate regulations in cost-benefit terms, or even cost-effectiveness terms, because the costs are altered in unknown ways by imposing the regulations themselves. I've never seen this properly addressed.)

Who are you, and what have you done to Martin Wolf? (And could you maybe see about replacing more business columnists with pod people?)

Robert Solow on the financial collapse, in the form of reviewing Richard Posner's book on the same. I am reassured to find that my own half-baked thoughts align with Solow's.

A world gone mad is one where an ex-_IMF_ economist sounds like he could be writing in New Left Review... (I should ask ZMS if he knows this character)

Someone from the Mercatus Center argues against regulation. In other news, cooks prepare food.

Oh yes, an oldie-but-goodie: how to make $800k as a stock-tout in high school. Whatever became of young Mr. Lebed?

The confession of his own fraud is interesting. The core proposal (underneath the failure to write clearly) is that selectively prosecuting frauds after they happen is less effective than a regulatory compliance regime that makes fraud hard to commit in the first place. This is fair enough, but (as Tanta used to say), there is no way to actually verify the claims in mortgage applications & c. _quickly_. Requiring it would lead to massive changes in an industry which has rebuilt itself around speedy securitization. This may or may not be a bad thing.

Word.

No.

"Conservative policies couldn't have worked better for the financial supporters of the right. But for virtually everyone else, conservatism has nothing left to offer."

A decent article, but the infographic on the components of the cost is _horrible_ - you have to read it by area (already dubious), but the bars suggest reading by height, which is utterly misleading.

To think through.

Evisceration, but in a friendly way. (I am so out of it that hadn't heard about the whole airline inspection thing before this.)

Cf. my "modest proposal for the reform of corporate governance" from a few years ago