There are a number of things that I think might help, some more than others (and some that I'm more confident of than others).
A big one would be to shift to exchange-traded (or at least -cleared) derivatives. That makes the task of analyzing systemic risk much clearer, makes bailouts simpler if they need to happen (just prop up the clearing house, all others go bankrupt), and makes bailouts much less likely: The incentives for running an exchange are different than for running, say, and investment bank. As I understand it, no clearing exchange has failed in US history, indicating that the risk is at least smaller.
There are some regulatory & accounting fixes that would help. Under the rules, banks with mortgage assets needed to keep a moderate amount of cash (20%?) to offset possible losses. But if they slice the mortgages into CDOs, then no reserves were required, which is very much a perverse incentive. The rules need to be rethought and fixed.
Some of the government policies are also destructive: Fannie Mae and Freddie Mac's accumulated losses look to be 4 times larger than the TARP losses. They were feeding the housing bubble, largely because of the policy of promoting home "ownership". The actual policy promotes effectively renting your house from the bank, not owning it outright. I also believe that the Federal Reserve's low-interest-rate policies over that last several years has been a grave mistake.
I'm not sure if that would be enough, but fixing those would be a big help. Of course, getting those kinds of fixes done is politically nigh-impossible.
A big one would be to shift to exchange-traded (or at least -cleared) derivatives. That makes the task of analyzing systemic risk much clearer, makes bailouts simpler if they need to happen (just prop up the clearing house, all others go bankrupt), and makes bailouts much less likely: The incentives for running an exchange are different than for running, say, and investment bank. As I understand it, no clearing exchange has failed in US history, indicating that the risk is at least smaller.
There are some regulatory & accounting fixes that would help. Under the rules, banks with mortgage assets needed to keep a moderate amount of cash (20%?) to offset possible losses. But if they slice the mortgages into CDOs, then no reserves were required, which is very much a perverse incentive. The rules need to be rethought and fixed.
Some of the government policies are also destructive: Fannie Mae and Freddie Mac's accumulated losses look to be 4 times larger than the TARP losses. They were feeding the housing bubble, largely because of the policy of promoting home "ownership". The actual policy promotes effectively renting your house from the bank, not owning it outright. I also believe that the Federal Reserve's low-interest-rate policies over that last several years has been a grave mistake.
I'm not sure if that would be enough, but fixing those would be a big help. Of course, getting those kinds of fixes done is politically nigh-impossible.
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