Mort Zuckerman on the Financial Crisis and what we should do

Written by  //  October 22, 2008  //  Economy, Government & Governance, Public Policy, U.S.  //  Comments Off on Mort Zuckerman on the Financial Crisis and what we should do

The Anatomy of the Financial Crisis and Why We Must Get It Right
Everyone is haunted by the fear our financial crisis might unwind into something like the Great Depression. The world of finance is undergoing a hundred-year storm. It has inflicted the greatest destruction of wealth in our history. It swept away giant blue-chip financial firms, in a few months, even in a few days of fear, panic, and mistrust, that had made it through the Great Depression. It’s turned out worse than the most pessimistic of us imagined.
Most critically, the financial world is seized by a collapse of confidence. The uncertainty over the value of the securities they hold has led to an enormous risk aversion. Customers, creditors, and shareholders of the major financial firms wonder whether they might survive. Once confidence collapses, there is no telling when the selling will stop.
All of this has produced an unprecedented credit squeeze in which banks are refusing to lend to other banks, much less to businesses and individuals. This squeeze has had a particular impact on the newly unregulated emergent shadow banking system made up of mortgage lenders, investment banks, broker-dealers, hedge funds, private equity funds, money market funds, structured investment vehicles and conduits. more

What next?
Here are some proposals:
1. We must have a quick and efficient way to sustain more banks with capital injections, not just the major banks, using appropriate information gathered by bank supervisors.
2. We need to expand the definition of banks to extend appropriate regulatory regimes to the shadow banking system.
3. We will have to oblige the newly defined banking system to build up equity capital when their lending is expanding, for financial busts too often follow credit booms.
4. We must establish a standard for risk management and risk assessment covering mortgages, derivatives, debt, and even equity and especially on new financial instruments.
5. The Fed will have to continue to guarantee interbank borrowing by banks eligible for recapitalization to reactivate the interbank lending market and reduce abnormally high rates of interest on loans that float above the LIBOR interbank rate.
6. If there is to be a fiscal stimulus program, it should be primarily in infrastructure and not on tax cuts: these tend to be saved and not spent (and Obama’s are more of a new entitlement program to people who don’t pay any tax at all)

The danger is that politicians, who have little understanding of the financial world, may draw the wrong conclusions from Wall Street follies and make the wrong decisions, as they try to revive our financial system.
We must get this right. The new administration must draft the best of our national talent into shaping and administering these new policies. Otherwise the recession will not be U-shaped and relatively short. It will be L-shaped and extend for many unnecessary years.

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