HOLD ON, WE WANT TO BLAME THE UNDESERVING POOR AND BARNEY FRANK:

Free-Marketeers Should Welcome Some Regulation: The private sector made the biggest mistakes. (PAUL SINGER, 4/03/09, WSJ)

[T]his crisis was primarily caused by managements and individuals throughout the financial system who exercised extremely poor judgment. The private sector, not the public sector, is where the biggest mistakes were made.

In the past decade, most global financial institutions built highly leveraged balance sheets -- sometimes as high as 30 to 1 -- that were stuffed with risky assets. These institutions also bought on a large scale for their own accounts the same securities they sold to their customers. Our anachronistic regulatory framework didn't catch the problems, and warped incentives and compensation schemes fueled the risk-control failures that eventually brought on the crisis we face today.

Now we must create a new regulatory infrastructure that will meet three fundamental tests. First, it must assess and measure risks accurately, including the compounded risks of herding (traders being similarly situated and forced to unwind simultaneously). Second, it must impose significant margin requirements on all exposures. And finally, it must bring all investors and traders -- regardless of whether the risk holder is a hedge fund, bank, private equity fund, individual or government agency -- under the regulatory umbrella. These three measures will diminish volatility and reduce the likelihood of a future financial collapse.

As is the case for Campaign Finance Reform, we need less regulation but greater transparency so that risk is priced more accurately. The need for uniformity is a given.

Posted by Orrin Judd at April 3, 2009 11:08 AM