George Soros, in his latest book:
…the puncturing of the subprime bubble in 2007 set off the explosion of a super-bubble, much as an ordinary bomb sets off a nuclear explosion…
What made the super-bubble so peculiar was the role that financial crises played in making it grow.…The first and most serious one was the international banking crisis of 1982. This was followed by many other crises, the most notable being the portfolio insurance debacle of October 1987, the savings and loan crisis that unfolded in various episodes between 1989 and 1994, the emerging market crisis of 1997-1998, and the bursting of the Internet bubble in 2000. Each time a financial crisis occurred, the authorities intervened, merged away or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever increasing credit and leverage, but as long as they worked, they also reinforced the prevailing misconception that markets can be safely left to their own devices. It was a misconception because it was the intervention of the authorities that saved the system; nevertheless these crises served as successful tests of a false belief, and as such, they inflated the super-bubble even further.
Financial regulation is before Congress right now. A Senate Panel is grilling the chief players. Does anyone want to hear more from Soros about what really occurred?
Yes, I’d like to hear if he thinks the Glass/Steagall Act should be reinstated, or a new, similar bill introduced, to keep the banks and the investment corporations forever separate.
[Bank] Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks into hedge funds where they properly belong.
Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.
Finally the drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks, which will probably discourage the securitization of loans.
…But the efficient market hypothesis has been conclusively disproved…the entire edifice of global financial markets, which was erected on the false premise that markets can be left to their own devices, has to be rebuilt from the ground up.
The four reforms that Soros believes are necessary:
1. Because markets are bubble-prone, central banks must have the authority to prevent bubbles from growing too big.
2. Because monetary tools alone are insufficient, central banks must control the availability of credit by varying margin and minimum capital requirements according to requirements.
3. Because synthetic securities such as credit default swaps are potentially destabilizing and increase systemic risks, the issuing of synthetic securities needs to be subject to regulatory SEC approval.
4. Too-big-to-fail banks must use less leverage and be very restricted as to how they invest depositors’ money.
For more, borrow the book. It is in the library at the YCD office, 4809 Tieton Dr.