LET'S TRY MARKET-ORIENTED MARKET REFORM
June 3, 2008
The demands for more government regulation of financial markets are growing louder and more insistent in the wake of the housing meltdown, says Bert Ely, principal of Ely & Company, Inc.
While some advocates call for an expansion of the Federal Reserve's regulatory power, this would not be sufficient to neutralize potentially destabilizing forces before they cause financial havoc. The mess in the financial system is a direct result of previous government rules that pushed markets in the wrong directions, says Ely. To prevent another crisis, the rules must be changed, aligning the incentives of financial players with optimum market outcomes.
Some key changes to implement, says Ely:
- Scrap the antiquated leverage-ratio requirement for bank capital.
- Encourage banks to use "covered bonds" to fund and hold onto the fixed-rate mortgages they originated.
- Eliminate the double taxation of corporate dividends.
- Modify fair-value accounting rules.
- Hold bond-rating agencies more accountable for their ratings.
Instead of having the Federal Reserve or other regulators try to better referee a game played under poorly conceived rules, Congress should change the rules, says Ely.
Source: Bert Ely, "Let's Try Market Oriented Market Reform," Wall Street Journal, May 30, 2008.
Browse more articles on Government Issues