A 10-Step Recovery Plan

Hyman Minsky wrote about the tendency of financial markets to instability, to speculative extremes.  As optimism returns to financial markets, Alan Blinder, a former vice-chairman of the Federal Reserve, reminds us in the New York Times on January 19, 2013 of this and the reason for it: “unlike elephants, people forget.”  He cited Hegel: “people and governments have never learned anything from history.”  I believe we do learn and agree with Oscar Wilde that “experience is the sum of our errors.”  In this renewed market optimism, we cannot forget the lesson that speculative activity leads to collapse and causes pain, and seek to avoid it.  Investment plays a positive role and should not be maligned, but speculation does not.

 

Blinder proposes “10 financial commandments” to help us navigate the financial terrain and to learn from the financial crisis:

1. Remember that people forget.
2. Do not rely on self-regulation – the Dodd-Frank Act of 2010 has the potential to change regulation for the better, and the financial industry’s resistance to it must be overcome.
3. Honor thy shareholders – directors must be reminded of their responsibilities and held accountable.
4. Elevate risk management – the effort has to come from regulators and management.
5. Use less leverage – Blinder compares this to alcohol: a bit can have health benefits, but extreme intake can be lethal.
6. Keep it simple – modern finance profits from complexity, but this hurts confused customers.
7. Standardize derivatives and trade them on exchanges – derivatives can play a benign role by helping investors to hedge, but they have to be straightforward, transparent and properly regulated.
8. Keep things on the balance sheet – shadow banking hides risk and regulation should ensure risk is properly represented and supported through adequate capital.
9. Fix perverse compensation – the bonus system can encourage the taking of monumental risk which leaves the public exposed
10. Watch out for consumers – financial predators on unsophisticated consumers can undermine the whole economy, as demonstrated by the subprime housing crisis.