His main conclusions are that the deregulation of the late 1990s was not in and of itself responsible for the crisis; that reform must involve a balance of hard rules (mandatory capital requirements as cushions, for example) and oversight flexibility so that banks can't devise new ways around old rules; and that the Obama administration should move more in the direction of hard rules, i.e. take "a few steps away from discretion and toward clarity." He also suggests that a financial sector tax wouldn't be the worst idea, as it would "acknowledge that banks serve a vital function in a market economy but that they also have a habit of taking unwise risks." He concludes by noting that cutting the size and profitability of banking would allow other industries to win back top talent that Wall Street lured with high salaries.
There are a ton of different takes on the Leonhardt piece, whether from top economists, policy wonks, or industry professionals-turned-business bloggers.
- Actually, Deregulation Did Cause the Crisis, counters finance blogger and professional Barry Ritholtz. "This wasn't a case of DC failing to keep up with Wall Street," as Leonhardt argued. Instead, he thinks it would be "more accurate to observe that DC rolled over for Wall Street, and gave the Street precisely what it asked for." He looks at specific legislation from 2000 effectively preventing oversight.
- Let's Institute Stress Tests, Too, says fellow blogger and former business professional Bill McBride."The banks hate the stress tests because they will expose their risk taking ... That is a strong argument for making the stress tests a regular practice. Publish the test scenarios--and the results for each bank."
- Let's Institute a Bunch of Things: More Rules, Less Flexibility "At the risk of being branded one of those liberal haters of American exceptionalism," writes Mother Jones's Kevin Drum, reading a paragraph of Leonhardt's about the rules-heavy Canadian method of regulation, "sign me up for the blunt rules approach." Finance reform guru Mike Konczal agrees:
Imagine how easier it is for a regulator to face an angry congressman who is very upset that a powerful local community bank is going to be resolved. "What could I do? My hands are tied, it is what the law requires." is a great response for him. Now picture that for trying to resolve a multi-trillion dollar institution who will shamelessly lobby with hundreds of millions of dollars. Suddenly clear rules look a little bit better, don't they?
- Nothing Will Be Perfect, Harvard economist Greg Mankiw reminds readers in a recent New York Times op-ed that does not mention Leonhardt's piece by name. He seems okay with regulation that would "raise the cost of doing business." Here are his suggestions:
We should plan for future financial crises, to occur at some unknown date for some unknown reason, and arm ourselves with better tools to clean up the mess ... My favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital
- Thanks, Greg Barry Ritholtz mockingly summarizes Mankiw's op-ed, which he terms "intellectual detritus," in three points, the last being "we have no clue why economists suck--but they just do." He doesn't cotton to Mankiw's somewhat mild, resigned approach to regulation.