More Reading

• The WSJ has put together its second annual "Future of Finance" convention. There is far too much to link, but here's the summary and the main page. It was, of course, heavily populated by private-sector representatives, so the summary shouldn't be too surprising:
  

  Their recommendations acknowledge the need for a stronger role for government regulators. At the top of their list was a call for increasing the capital that financial institutions must hold, with higher requirements for institutions posing greater risks to the system. Second on the list was a call for the Financial Stability Board to impose toughened regulatory standards across nations.
  
  The financiers, however, shied away from other, more intrusive government actions. They rejected a proposal requiring institutions to get regulatory approval before selling innovative new products. They steered clear of proposals that would force institutions deemed "too big to fail" to divest certain businesses. And they dodged the explosive issue of compensation.
  
  That led one ex-regulator, former Federal Reserve Board Chairman Paul Volcker, to chastise the group for not going far enough. "Wake up, gentlemen," he said. "Your response is inadequate."
  
  But the prevailing sentiment of the largely private-sector gathering was that, while strengthened regulation is clearly needed, there is also a significant risk of overreaction. As hedge-fund manager and philanthropist George Soros warned: Markets fail, but regulators fail as well.
  

• Thankfully, Paul Volker was there, and he had some (in my view) encouraging things to say:
  

  I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of? You want boards of directors to be informed about all of these innovative new products and to understand them, but I do not know what boards of directors you are talking about. I have been on boards of directors, and the chance that they are going to understand these products that you are dishing out, or that you are going to want to explain it to them, quite frankly, is nil. I mean: Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.
  

  Here's my favorite part of what he said:
  

  I think that I am probably going to win in the end.
  

  The Baseline Scenario summarizes his position perfectly: "Volker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money." I must add, I am very very encouraged by his statement that he believes he will "win in the end." I very much hope he is accurately assessing his impact on swaying Obama, and politicians in general, to make some more fundamental reform.
• Another interview with Volker, from a German paper. Nice to see an international perspective. Volker says the same as what he was saying in WSJ's conference:
  

  SPIEGEL: You have been clear about your ideas. Do you really believe we have to break up the big banks in order to create a more sustainable financial system?
  
  Volcker: Well, breaking them up is difficult. I would prefer to say, let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.
  
  SPIEGEL: Banking should become boring again?
  
  Volcker: Banking will never be boring. Banking is a risky business. They are going to have plenty of activity. They can do underwriting. They can do securitization. They can do a lot of lending. They can do merger and acquisition advice. They can do investment management. These are all client activities. What I don't want them doing is piling on top of that risky capital market business. That also leads to conflicts of interest.
  

• Financial Times has a really interesting post from GS about China's exchange rate, essentially saying GS is no longer convinced that China is artificailly screwing exchange rates. Also, GS is saying that Chinese domestic consumption is skyrocketing. This is really, really interesting, and flies in the face of popular economic commentary. In the long run, this could be a very good thing, assuming it's correct. I don't know if you guys can read it though - it's probably behind a paywall that I am lucky to bypass: my employer gives me access to FT. I really wish stuff like this was freely available!
• Perhaps we need to change BRIC to BIC.
• There's been lots of talk about regulating, or reducing the power of, the Fed. FT (again, likely behind a paywall) writes that the Fed must be protected. Note that I do not quote this, or the previous FT link, because they are behind paywalls. Again, wouldn't it be nice if it was free? Then I could quote and discuss here properly. This is one of the reasons I rarely link them - why bother when the people I know who read this don't care to pay for access? For the record, one can subscribe free and access a whopping 10 articles a month...
• Krugman writes about Samuelson, who passed away Sunday. He was one of the great theoretical economists. He wasn't a Marx or Keynes, both of whom drove a philosophy that altered the world, but he had a tremendous impact on the field of economics itself. He was one of the first to make economics a quantitative field.
• Not sure if I already posted this: Goldman does something truly interesting. They are giving their top 30 executives bonuses in the form of stock that cannot be exercised for 5 years, amongst other interesting changes. This is a very fundamental change in bonus structure that is being done without any kind of formal regulation or law. I wonder if other banks will follow suit. This would be a tremendous step in the right direction. EDIT: Yes, I posted it in my previous "Reading" post, but it bears mentioning again.