Monday, June 28, 2010

Roubini on how to fix the financial system

Nouriel Roubini's has a new book, Crisis Economics, where he makes a few simple suggestions for fixing the financial system. Since he predicted the crash back in 2006, he's got some credibility on this issue.

The New York Times Book Review has a nice summary.

1. Put traders and i-bankers bonuses into a pool held in escrow for several years.
2. Require credit rating agencies to be paid by investors in securities, not bond issuers.
3. Removal of the credit rating agencies’ certification by the Securities and Exchange Commission as “nationally recognized statistical rating organizations" so anyone can compete.
4. Identify and ban a few of the most dangerous derivative (e.g. like credit default swaps), just as we ban people from insuring their neighbors' houses against fire.
5. Force financial conglomerates to retain capital relative to all the risks posed by their various units, which would discourage overly large financial institutions (like Citi) that have to be repeatedly bailed out.

Another thoughtful analysis is provided by the Squam Lake Group, including many similar ideas.

What do you think? Is this unreasonable? Is it infeasible?

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