What still needs to change as a result of the crisis?

1. Francis Longstaff

   Eliminate toxic government policies and incentives.

2. Richard Roll

   Reduce the size of the public sector relative to the size of the private sector (in most countries).

3. Vox Day

   Assets marked to market, the closure of all insolvent banks, the Congressional removal of the Federal Reserve monopoly on money.

4. Ross Levine

   We need institutional reforms that oblige the government officials and financial regulators to more frequently work for the public at large.

5. Phillip Anderson

   Substantially better collection of the economic rent, worldwide, to stop it capitalizing into a tradable price. But like this will ever happen!!

6. Jacob Madsen

   Banks need to be regulated more and government and private savings need to increase. We will never overcome the crises if the debt is not reduced.

7. John Rubino

   Everything, since nothing was fixed by the crisis. The government still owns a printing press, the dollar is based on nothing, the military empire and the welfare state are still growing. Debt is so high that no fix is possible, only collapse and then rebuilding.

8. Fred Foldvary

   Taxes on wages should be replaced by taxes on land value. The money supply and interest rates should be set by the market rather than by the Fed. Fannie Mae and Freddie Mac should be completely privatized. The government should eliminate mortgage guarantees.

9. Fred Harrison

   Re-structure the pricing mechanisms to eliminate the deadweight losses caused by taxation. This permits government to reduce income taxes, making it possible to re-employ marginal workers, re-launch capital formation and build confidence in sustainable growth.

10. Steve Keen

    Wall Street's power over the political system needs to be broken, financial fraud needs to be pursued as vigorously now as Bill Black pursued it in the aftermath to the Savings and Loans crisis, and much of the debt issued to households in the last 2 decades needs to be written off in a public jubilee.

11. Yalman Onaran

    The zombie banks that are being propped up by their governments need to die. The biggest banks need to be split up so there's no more too-big-to-fail going forward. There needs to be a serious debt restructuring of consumer, government and corporate debt so we can get out of the credit crunch.

12. James Kwak

    The financial system needs to become more focused on intermediating credit flows from savers into the real economy and less focused on maximizing the volume of derivative or ancillary transactions and financial assets that provide small benefits (liquidity, price discovery, etc.) for the risk that they introduce. How to do this is an open question.

13. Peter Tanous

    The United States must adopt a credible solution to the rising deficit before it becomes unsustainable and that day is fast approaching. If interest rates were to return to the historical average rate that the treasury pays in interest (5.7%), we would be paying $800 million more annually than we are paying today and that represents 80% of personal income taxes today.

14. Aaron Brown

    We do. The arc of financial evolution is beyond our control, our job is to survive the ride, and that will require all kinds of change. We are living in the best of times, for all the dramatic uncertainties, and they will only get better. But we will not be able to enjoy them unless we go with the flow. The best preparation is to listen to a lot of Bob Dylan and ignore financial reports.

15. Matthew Lynn

    Where do we start! One, Europe needs to bring an end to the euro – the most dysfunctional monetary system ever created. Second, we need to create a new global monetary system based on something other than the dollar. And finally, we need to get our debt – personal, corporate and government – down to manageable levels (by which I mean about 50% of GDP). That is going to be a long hard road.

16. Dean Baker

    We need economic policymakers who believe in accounting identities. The fundamental imbalance in the economy is the trade deficit. The $600 billion trade deficit (it would @$900 billion if we were near full employment) logically requires either a large budget deficit or negative private savings. We teach this in every intro class. If the people at the Fed, CEA, and Treasury understood it, we would have much better economic policy.

17. Robert Hardaway

    1. Promulgate one critical regulation--namely that loans backed by government entities require a 20% down payment
    2. Repeal the home mortgage deduction
    3. Include housing prices in the CPI
    4. Repeal all provisions punishing banks for not lending to uncreditworthy buyers
    5. Restrict power of local communities to jack up home prices by exclusionary rules and zoning restrictions on development

18. Jerry Davis

    Dodd-Frank was a hodge-podge of reforms without a coherent underlying theory, but many of its components would be helpful, if they managed to be filled out without undue influence from the finance sector. But as long as 15-25% of mortgages are underwater, it is hard to foresee an end to the economic malaise in the US, as homeowners are unable to move to pursue employment and other opportunities elsewhere and consumption is depressed by a negative wealth effect.

19. Aaron Clarey

    Too much to fit into one paragraph. People must learn to spend within their means, and not just spend within their means, but not rely on the government to pay for things they personally and individually cannot afford. Banks and their managers must be allowed to fail and I would go so far as to even banish those bankers and managers that full-well knew what they were doing from ever working in banking again. A constitutional amendment criminalizing rent-seeking and lobbying, punishable by death would also be a big help.

20. John Wasik

    1. Fannie/Freddie need to be re-organized or sold off, along with their portfolios while the government sets up a new guarantee system for mortgages without excessive securitization
    2. Homeowners should be allowed to refinance at federal funds rate
    3. Homeowners who are jobless or insolvent should be able to write down mortgage principal in Bankruptcy
    4. The excess inventory of REOs should be sold off in large lots
    5. Those who wish to stay in their homes should be offered refinancing or rent to buy options.

21. Michael Lim Mah-Hui

    Need to regulate and down size the over-blown and over-rewarded financial sector and players and bring it back to serve, rather than to destabilize, the real economy. Need to address the growing inequality issue, in particular, the phenonema of wages falling behind labor productivity growth and the growing share of GDP accruing to capital and declining share to labor that lead to recycling of surplus savings of rich into risky/high yield financial assets (resulting in financial asset bubble) and into household loans (debt bubble) for majority whose income has stagnated.

22. Les Leopold

    Wall Street must be re-shackled so that it becomes a much less profitable and much more boring place to work -- much as it was from the 1930s through the 1960s. Also, taxes on the super-rich much rise dramatically to reallocate the capital that fuels Wall Street gambling. A significant financial transaction tax also is needed to re-balance the economy. Money must be moved away from the financial sector and into the real economy. Re-instituting Glass Steagall and busting up the big banks would help as well. While we're at it, we should get rid of the carried interest tax break for investment partnerships and tightly regulate hedge funds.

23. Robert Litan

    I am reasonably satisfied with Dodd-Frank as a broad outline, but we need clear and final rules relating to derivatives clearinghouses and their ownership. As a society, we also need to decide if and how to subsidize housing, and what to do with the GSEs. My inclination is to wind the GSEs down and provide means-tested, on budget, down-payment support for low to moderate income householders, recognizing that budgetary constraints may keep the size of those subsidies too small for many tastes. But one of the things we have learned from this crisis is that renting is not the bad social outcome it was previously thought to be – renting contributes to labor mobility, which can lead to lower unemployment rates and faster growth.

24. Paul Sperry

    Abolish the affordable-housing charter regulating Fannie Mae and Freddie Mac and by extension the primary mortgage market (i.e., repeal the Federal Housing Enterprise Financial Safety and Soundness Act of 1992); and repeal the 1995 revisions to the Community Reinvestment Act. Also, bar Justice Department prosecution of banks and mortgage lenders for lending discrimination under "disparate impact" and "secondary impact" theory. Finally, repeal the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizing the creation of the Consumer Financial Protection Bureau.

25. Christine Richard

    We need to acknowledge that several decades of trade policy has been a failure. Of course, if you say this people will scream about how limiting trade will bring on the Great Depression. But what about the risks of ceding our financial strength to countries with which we have serious ethical and political differences? Or the risk of trading our manufacturing base for an outsized Wall Street? The resentment of Wall Street reflects this dynamic. It's too easy to make money on Wall Street and too hard to compete in other parts of the economy. We need to figure out a way to draw the smartest people in our society away from Wall Street and into other areas of our economy. This is easier said than done and I wish I had the answer for how to set this change in motion.

26. Viral Acharya

    The financial sector recapitalization and to an extent its prudential regulation have improved. But this was a housing sector boom and bust as well, and no decisive measures have been taken in the United States and elsewhere to address this directly. Rather than stimulating the corporate sector and the financial sector further, a better fiscal stimulus would be to restore household equity on mortgages, and get the banks to take a one-time hit (and further recapitalize it if needed), so that both households can rebuild their consumption and demand and banks can get exonerated from the burden of a "zombie" asset class sitting on their balance-sheets and restricting their ability to lend freely until global growth prospects are restored (in some way).

27. Edward Pinto

    The US housing finance market of the future should be governed by four basic principles:

    • Principle I: The housing finance market can and should principally function without any direct government financial support.
    • Principle II: Ensuring mortgage quality and fostering the accumulation of adequate capital behind housing risk can create a robust housing investment market without a government guarantee.
    • Principle III: All programs for assisting low-income families to become homeowners should be on-budget and should limit risks to both homeowners and taxpayers.
    • Principle IV: Fannie Mae and Freddie Mac should be eliminated as government-sponsored enterprises (GSEs) over time.

28. Michael Hirsh

    The size of Wall Street firms, and the disproportionate size of finance in the overall economic equation of America. Finance, when completely unleashed, came to dominate the real economy, rather than serve in its traditional role as a supplier of capital to the "real" economy of goods and services. Through most of the high-tech era of the last part of the 20th century, the wizards of Wall Street were justifiably proud of the role they had come to play in providing venture capital to entrepreneurs. The ability of a smart person with a smart idea in America to turn it into a new company and new product was unmatched in the world. It was the heart of America's strength, and it was thanks in good part to the rollicking open markets on Wall Street. But somewhere along the line, toward the end of this era-as the zeitgeist hit its peak and government regulators backed off completely -- Wall Street became the master of Main Street rather than its handmaiden.

29. Ann Pettifor

    Vast amounts of private household, corporate and financial sector debt needs to be paid down/written off/de-leveraged. Government should be ensuring that this de-leveraging takes place in an orderly way. Instead, the process is taking place chaotically…..Second, the private finance sector needs to be re-regulated. Banks may need to be nationalised if taxpayers are asked to carry the full burden of their losses. Third, capital mobility must be restrained if central banks are to regain control over the whole spectrum of interest rates – short and long, real, safe and risky. Low rates of interest are vital for the restoration of sound economic activity, and to enable entrepreneurs to remain profitable after borrowing to invest. “Tight” but “cheap” credit must be the future: that is credit for viable economic activities, not speculation, at low, sustainable rates of interest. In the meantime central banks and governments have to play a role in reviving economic activity in economies depressed by vast debts.

30. Roddy Boyd

    A separation of commercial and investment banks, a la Glass-Steagall above, is the first and most important order of business. Entities such as large banks that fund overnight via the Fed, or which accept consumer deposits, should not have more than a fraction--say 10%--of their earnings derived from capital markets. The corollary also holds true: It does not serve the U.S. public interest to have risk-oriented enterprises such as banks or mortgage companies (Countrywide, which had applied to be a primary-dealer in 2007 if memory serves, and Washington Mutual, which also had a large capital markets unit, are the primary examples here) able to fund or claim protection from commercial bank/Thrift holding companies. Secondly, the secondary market for residential mortgages needs to be rethought entirely. It is unclear that three years on either Freddie Mac or Fannie Mae can exist without direct government subsidy. It appears a run-off of these institutions needs to be considered, perhaps followed with an evolution to a German-style pfandbriefe securitized mortgage structure. Regardless, it is imperative that U.S. policy be to allow risk-taking from institutions with no exposure to the Federal Reserve or the U.S. consumer’s deposits. As such, their risk exposure is limited to a combination of equity capital and market willingness to extend short-term financing. Thus collapses such as Drexel Burnham Lambert in 1989, Enron in 2001 or Refco in 2005 are absorbed by the market.

31. Clive Boddy

    Changes in financial laws, rules and regulations will have no effect if Corporate Psychopaths are still in positions of power and influence in corporate banks, as they will always find ways around the rules or ways to bend them to their own advantage. Anyone at senior director level in the corporate sector should be screened for psychopathy by a combination of other report psychopathy measures (where others report on your behavior) self-report psychopathy measures (where you report on your own behavior) and if necessary, brain scans. Their removal to positions of less influence and power will allow those with a conscience to take charge and this will decrease the greed involved and increase the humanitarian element. Governments also need to realize that in many cases the amount of money they have given banks to bail them out could have instead been given directly to individuals with mortgages to pay off their debts to the banks, thus solving the debt problem from the bottom up rather than trying to solve it from the top down. This would have re-capitalized the banks and therefore saved them, saved many people from homelessness, boosted consumer confidence, underpinned the housing market, and put money into the system where it would do most good (via the multiplier effect). This opportunity has not yet been lost as the massive "quantitative easing" is still taking place and that money could be best directed at those who need it most - those at the bottom of society rather than those at the top.

32. Isaac Gradman

    The changes fall into two categories: (1) Changes to the structure of the conventional fixed-rate mortgage. Do away with fixed-rate loans without prepayment penalties, as they impose significant systemic risk on the U.S. economy (because homeowners tend to exercise their free prepayment option, the U.S. financial system is subject to the havoc and systemic risk caused by frequent prepayment waves). (2) Changes to the structure of mortgage backed securities transactions. The goal is to create a system where the economic interests of participants are properly aligned (throughout the life of the deal). Only by doing so can we attract the private capital back to the U.S. housing market (as most would agree that we no longer wish to have a mortgage market financed entirely by the government). We should consider restricting the firms that originate and sell loans from later servicing them to remove the primary conflicts of interest for the servicer. Investors should demand that the trustee be unambiguously independent and provided with economic incentives to protect investor interests. To encourage this reform, rating agencies should refuse to rate a transaction that does not feature an active and independent trustee. The federal government should consider abolishing the practice of allowing trustees to be indemnified by those they are responsible for monitoring. Finally, we should standardize MBS trusts and the agreements governing them, as well as create a new entity that serves, much like ISDA, as the standard-bearer for private label securitization. Additional reforms and details regarding the above proposals can be found in Way Too Big to Fail, authored by Bill Frey and edited by Isaac Gradman.

33. Robert Rodriguez

    One of the issues that has not been addressed is "Too Big Too Fail", which is why Europe is a mess. Their banking system is far more concentrated than the US and thus is more aligned or attached with their central government. The money from the ECB is being funneled into the banks and the banks are buying the sovereign debt (it's a shell game). It is the process by which the ECB has created three year loans through the LTRO at 1 % cost that allows banks to borrow, with pledged securities, and then buy sovereign debt. I refer to this process again in my Caution: Danger Ahead speech. In particular, I reference Italy. The Italian government guaranteed Italian bank loans and with this guarantee, the banks pledged these assets for additional ECB loans that provided the necessary liquidity to buy more Italian government debt, thus, my shell game reference. It is amazing to me that this game is allowed to continue. In the short-run it can but in the long term, reality will prevail. In a similar way, I believe institutions in this country knew that something was unsound, but they kept playing the credit game until the music stopped-----financial crisis. At FPA I did not allow this game to continue. Here in the United States we are seeing further concentration in the banking system. Now beyond TBTF, the financial excesses are unfolding at the federal level. I would argue that the monetary policy of Chairman Bernanke is creating that same type of environment of cancers in the system and we will not know what the negative effects are until later (just like we didn't know about the bad credit underwriting in the last cycle). Bernanke's interest rate policy is forcing various financial institutions and investors to take risks that they otherwise would not. I believe this policy is incredibly dangerous and unwise and I believe the Chairman should be replaced.

34. Donald Rapp

    I am not fully sure how to answer this and I don’t think that anyone has a complete answer. I am pretty sure however, about some things that must change. First we need to understand that we are not in the midst of a temporary downturn and all we need to do is ride it out and when we recover, everything will be OK. More than any specific policy change, we need to understand that what we are going through now is a fundamental breakdown of capitalism due to the factors listed in the answer to the previous question: dependence on paper assets rather than salaries, free trade, automation, too much concentration of wealth in the upper bracket, and above all, spending beyond our means at all levels building up debt and obligations that can never be paid back. The purpose of corporations is to maximize their profit, not to maximize production. They can now do that with fewer employees. Some specific things we need to do:

    1. balance the federal and state budgets yearly – cut spending and do not allow them to borrow any more; for example, the federal government can get out of the education business – we do not need a Dept. of Education with its “no child left behind”
    2. severely raise taxes on the rich, particularly for capital gains which should be taxed much higher than salaries
    3. require that mortgages issued by local banks be held in those banks for at least ten years and not be packaged into mortgage securities during the ten year grace period
    4. require that for any real estate transaction, the history of previous sales on the house be provided, and down payment must be at least 20% of a conservative appraisal
    5. require that public and private pension funds place less than 50% of their funds into stocks
    6. enact widespread tariffs to jump start manufacturing in the U. S.
    7. do not engage U. S. troops on the ground in the Middle East firing rifles at natives firing back with rifles
    8. raise interest rates to help middle class savers
    9. if any business (e.g. AIG) is too big to fail, require that they spin off all their subsidiaries
    10. regulate!

35. Hersh Shefrin

    Minsky warned us that the seeds of the financial crises of tomorrow are sewn when we address the financial crises of the past. In this respect, the sovereign debt crisis of 2011 in Europe comes to mind, although the downgrade of Treasury debt by S&P shows that the U.S. is not immune. He went on to say that these crises are baked into the system, and are unavoidable. Therefore, we are well advised to establish mechanisms to soften the blows when they arrive. Minsky's reforms feature four categories: fiscal, employment, industrial, and financial. It means running large enough fiscal deficits, short-term, to offset dramatic decreases in aggregate demand in the private sector. It means having public employment programs in place to keep employment from plummeting. It means having measures in place to keep systemically important firms from becoming too large, therefore too big to fail. It means having the Fed play a more active role in financing at the discount window, so as to keep tabs of the growth in speculative and Ponzi financing, which is the locus of where blowouts happen. Interestingly, Minsky proposed eliminating the corporate income tax, because he felt it encouraged excessive corporate borrowing. In a nutshell, we would be well served by embracing the insights of an economist who died a decade before the financial crisis, but whose ideas, although spot on, received too little attention from academics, public policy makers, and the media. Whether or not we move to embrace Minsky's ideas more strongly in the future will depend on our collective vulnerability to psychological phenomena such as confirmation bias (discounting views counter to our own) and availability bias (overweighting information that is readily available). Indeed, confirmation bias is so strong, that it typically prevents us from overcoming our ideological positions and learning efficiently from experience. That is why Minsky's view is likely to prevail in the long run, meaning financial crises are inevitable.

36. Laurence Siegel (more than one paragraph - see link)

Compiled by Gary Karz, CFA
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