Regulatory Responses To The Subprime Crisis - Proposed Solutions

Proposed Solutions

Further information: Subprime mortgage crisis solutions debate

“	America's genius has not been in avoiding problems, it's been in surmounting them once they happen.	”
—Warren Buffett

President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others. Legislation has cleared the house and is progressing in the senate.

A variety of regulatory changes have been proposed by economists, politicians, journalists, and business leaders to minimize the impact of the current crisis and prevent recurrence. However, as of April 2009, many of the proposed solutions have not yet been implemented. These include:

• Ben Bernanke: Establish resolution procedures for closing troubled financial institutions in the shadow banking system, such as investment banks and hedge funds.
• Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance. Re-instate the separation of commercial (depository) and investment banking established by the Glass–Steagall Act in 1933 and repealed in 1999 by the Gramm-Leach-Bliley Act.
• Simon Johnson: Break-up institutions that are "too big to fail" to limit systemic risk.
• Paul Krugman: Regulate institutions that "act like banks " similarly to banks.
• Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to "discourage them from becoming too big and to offset their competitive advantage."
• Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification.
• Eric Dinallo: Ensure any financial institution has the necessary capital to support its financial commitments. Regulate credit derivatives and ensure they are traded on well-capitalized exchanges to limit counterparty risk.
• Raghuram Rajan: Require financial institutions to maintain sufficient "contingent capital" (i.e., pay insurance premiums to the government during boom periods, in exchange for payments during a downturn.)
• A. Michael Spence and Gordon Brown: Establish an early-warning system to help detect systemic risk.
• Niall Ferguson and Jeffrey Sachs: Impose haircuts on bondholders and counterparties prior to using taxpayer money in bailouts.
• Nouriel Roubini: Nationalize insolvent banks.