“What the Government should do is place all securities under the sweeping powers of the same kind of agency that regulates drugs. And, just as drugs are tested for their real effects and approved with regulatory strings, securities too should be subject to testing (which would be in the nature of simulations) and approved, if found not to have malign side effects and found to be useful, only with their own regulatory strings. The ‘shadow’ financial system, as Roubini calls it, has become a giant ectoplasm of iffy puts and options, in a system that really has already developed the vehicles it needs for investment, thank you very much. And, as we have seen, Alien turns to the nanny state as soon as the downside whacks it. Thrust the fuckers into the light. Regulation now, regulation forever.”
And notice this, in today’s WSJ:
“Joseph Stiglitz, a professor of economics at Columbia University who won the Nobel in 2001, suggested misguided innovation itself caused the current turmoil. Noting that homeowners’ most important risk assessment is the likelihood that they can retain their home amid market volatility, Stiglitz said, “these are the problems [financial markets] should have created products to match. But they created risks, and now we’re bearing the consequences of this so-called innovation.”
There were some areas of agreement. The standards that gauge how much capital banks should hold — called Basel II for the Swiss city in which they were developed — focus too tightly on managing daily risk and not enough on handling crises. “What happens most of the time is not important,” said Scholes, noting the current financial turmoil comes on the heels of the dot-com bubble’s bursting and the Asian financial crisis of the early 1990s. “We have to learn how to handle the shocks when they occur.”
One idea that might prevent a repeat of the turmoil: a commission that would vet financial products before their release, akin the Food and Drug Administration’s evaluation of drugs before they’re released to the market. McFadden suggested, “we may need a financial-instrument administration that tests the robustness of financial instruments and approves only the uses where they can do no harm.”
I came across this quote at Marginal Revolution, the libertarian blog run out of George Mason university's economics department, which is a wholly owned subsidiary of Koch Industries. The bloggers denounced it as a terrible idea. If the crank libertarians are opposed to it, it must be good!