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Bloomberg reports that new financial regulations are on their way:

The Obama administration is preparing an overhaul of U.S. banking rules that would force financial companies to keep more cash on hand in case their trading bets go wrong.

Treasury Secretary Timothy Geithner told lawmakers yesterday that changes will include “strong oversight, including appropriate constraints on risk-taking.” Federal Reserve Chairman Ben S. Bernanke said the case of American International Group Inc. showed the “intense problem” of trading with insufficient capital to guard against losses.

This is probably good stuff, but one thing that I find persistently missing from these discussions is any sense of guiding principles. There are a million rules you might want to put in place to regulate the financial industry, and every one of them might individually sound sensible.  But what’s the big picture?  What are you trying to accomplish?

If you asked me, for example, I’d toss out three big principles.  #1 is firmer regulation over leverage, wherever and however it occurs.  This would produce regulations like the one above that increases capital adequacy ratios, but it would also lead to similar oversight of hedge funds; an overhaul of how capital and assets are calculated; regulation of effective leverage embedded in complex derivatives; rules about off-balance-sheet vehicles; and so forth.

#2 would be a stronger commitment to act countercyclically.  That would produce things like rules designed to force the Fed to keep an eye on asset inflation as well as goods inflation; a dedication to limiting credit expansion as well as credit destruction; capital adequacy rules that weren’t merely stronger, but that tightened during expansions and loosened during contractions; and stronger down payment requirements for mortgage loans.

#3, for lack of a better name, is a recognition that the global financial system could stand to have a little more sand in its gears.  Something to slow it down just a little bit.  This might include things like a small transaction tax; exchange trading for credit derivatives; and stronger transparency rules.

Now, I might be wrong about these principles, and I might be wrong about the specific regulations needed to support them.  Fine.  Suggest your own.  But rather than a huge hodgepodge of rules that might be good ideas on their own but might not really work together to accomplish what you want, I’d like to see a moderate, well-targeted set of rules aimed at fixing two or three big things.  The principles should guide what we do, not the other way around.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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