Make Markets Be Markets Conference, March 3rd 2010

So it’s good that financial reform is coming to a head this week, because it times well with what I and the rest of the Roosevelt Institute having been working on over the past 6 weeks. This Wednesday, we are hosting an event in conjunction with a report we are putting out for financial reform: Make Markets Be Markets.

One problem that’s been very obvious is that there’s a lack of clear necessary and sufficient conditions in the debate for financial reform. What needs to move, and at what point can we say “This Financial Reform Bill is a Good Bill”? So Rob Johnson, myself and the rest of the Roosevelt Institute team decided to put out a report detailing each of the pieces of reform that are necessary along with some key ideas to keep in mind. Here is the pdf of the final report, and you can check out chapters online. Here’s the table of content:

Introduction – Robert Johnson and Joseph E. Stiglitz
The Doom Cycle – Peter Boone and Simon Johnson
Fannie Mae & Freddie Mac – Raj Date
Regulator’s Incentives – Richard Scott Carnell
Credit Rating Agencies – Lawrence J. Wright
The Broken Consumer Credit Market – Elizabeth Warren
Shadow Banking – Raj Date and Michael Konczal
Securitization – Joshua Rosner
Off-Balance Sheet Accounting – Frank Partnoy and Lynn Turner
Over-the-Counter Derivatives Market – Michael Greenberger
Resolution Authority – Robert Johnson

Though we aren’t marketing it this way, in my mind I was gathering a Justice League of financial reform when assembling this project – people who are the best at each of their topics. So Michael Greenberger, former Director of the CFTC with Brooksley Born, is on derivatives. Elizabeth Warren will make the case for Consumer Financial Protection, Josh Rosner will argue for securitization reform, Frank Partnoy on balance sheets, etc. We also get Simon Johnson to walk us through the Doom Loop of what happens if reform doesn’t happen, and Richard Carnell does a cool chapter where he talks about regulator’s incentives and how to best set up the architecture for good financial reform.

On Wednesday morning each of the writers are going to present their topics at the conference. I’ll be explaining how to fix the shadow banking sector (something Tyler Cowen has said isn’t being fixed by anything he’s read – eek!). It’s going to be on Bloomberg TV, and you can stream it online (I’ll post more details soon).

Following that, each of our ideas, and the topic of financial reform in general, are going to be critiqued by a panel including Joe Stiglitz, George Soros, Peter Solomon, Jim Chenos, Stanley Sporkin and Bowman Cutter. So a top notch mix of academic economists, government regulators, and people who’ve worked in financial markets giving an opinion on what is necessary for financial reform.

If this interests you, I hope you spread the work about the talk and the report. I think right now is a really crucial moment in financial reform, and whether or not we are going to do this all over again in 5-7 years, and I hope this give a little bit more momentum for real change to take place in our broken financial markets.

(Aside: Oh boy, public speaking. The last talk I was involved with was a code review of our random number generators. We ordered pizza and took breaks to read from Numerical Recipes. Also, just saying, 6th week here. The senior fellows at the Roosevelt Institute have to start bringing an umbrella to the office, cause I’m making it rain, policy wonk style.)

I’ll be posting some great stuff from the report over the next two days. I hope you check it out and tune in to the conference.

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8 Responses to Make Markets Be Markets Conference, March 3rd 2010

  1. noompa says:

    The report looks mighty interesting, from the little that I have read thus far. Looking forward to streaming the video.

  2. Sandrew says:

    Haven’t gotten through it all yet (I jumped to the parts I care most about: OTC regulation, off-b/s accounting, and shadow banking), but some preliminary observations:

    1. I like the unfiltered wonkishness and use of specific recommendations. If it weren’t one-sided (which I understand is by-design), it’d be a great resource for framing a lot of the minutia of the regulatory reform landscape.

    2. Some inconsistencies and factual problems. The off-b/s accounting section struck me as particularly weak, both factually and in it’s prescriptions. Do Messers. Partnoy and Turner really want each interest rate swap to be shown on-balance sheet as both a payable and receivable? The gross-up at any of the large dealers would dwarf their already-huge balance sheets. Mandating this gross-up would kill the swap market by means of overburdensome capital requirements (unless capital requirements were simultaneously changed to exempt “re-net” swap pay- and receive-leg positions, in which case we’d just be left with too-big-to-read balance sheets).

    3. Greenberger does an admirable job explaining the nuanced differences between an exchange and clearing. But by his tendency to paint all CDS with the same brush, he may find himself on Felix’s CDS Demonization Watch.

    I’m sure there’s plenty more to chew on in this paper. Maybe I’ll follow-up in a post.

    Many thanks to you and your co-authors for your contribution to framing the debate on regulatory reform. I much look forward to listening-in on the discussion on Wednesday.

    Sandy

  3. Mike says:

    Hey thanks guys.

    Sandrew,

    I really wanted the report to be able to handle the most obvious counter-arguments from opponents within the body and emphasized in the conclusion. I did my best with feedback to the authors, but derivatives I think really excelled. Just from being in the conservations online, I wanted to make sure the author had an argument for clearing, and then an extra argument for exchanges once you have clearing, and then an extra argument for what doesn’t go on exchanges when you have a presumption of exchanges. It’s important people can follow that flow, and I think Greenberger did a really good job.

    Killing the regulatory arbitrages for shadow banking, and pushing them on stress tests for liquidity with some walls, with all the other reforms going into place – clear a shadow banking hurdle? Or nowhere near enough?

  4. skeptic says:

    “Making it rain” indeed! Good job, dude. I look forward to both reading the report and watching the video of the proceedings.

  5. Sandrew says:

    Hey Mike,

    Re: Shadow Banking:

    By my read, your Shadow Banking prescriptions broadly fall in the bucket of requiring Shadow Banks to hold more capital.

    Ex-ante, they did have capital requirements, no? i.e. The now-defunct CSE framework (which I believe was modeled on Basel II).

    Ex-post, aren’t all the Shadow Banks now either owned by banks or else BHCs themselves? Doesn’t this mean they have to hold to the same (albethey flawed) regulatory capital requirements as their commercial bank cousins? (Basel I framework?)

    What are the specific flaws with the regcap requirements for these types of entities (both under Basel I and II)? i.e. What should Basel III look like? Might plugging the arb opportunities within this system (e.g. the securitization regcap arb) be a sufficient fix? I have an idea for how to fix all these arbs in one fell swing: codify into the Laws of Man the Natural Law that no Risks can be created or destroyed, and accordingly neither can banks (shadow or otherwise) be “relieved” of capital requirements simply by virtue of changing the form of Risk: the Law of Conservation of Risk and Capital.

    You also suggest a charge for liquidity stresses. I’m skeptical that we can intelligently design such a charge, but I’m open to hearing specific ideas.

  6. Ed says:

    Good luck public speaking, and on camera no less. Picture everyone naked. Or give the speech naked. One of those two is supposed to work, but I forget which.

  7. The conference looks awesome! Your Justice League is missing Superman, Paul Krugman, but you do have Superwoman, Elizabeth Warren, more powerful by far than Wonder Woman, and the Green Lantern, Joseph Stiglitz!

  8. Mike, this is really good. Do you think the panel would approve http://bit.ly/TreasuryConsumersBillOfRights ? Please ask them to vote it up!

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