In case you hadn't noticed, the foxes are still guarding the banking henhouse. The only change: President Obama is reducing how many hens the foxes can kill while on guard duty.
The foxes, of course, are the financial wizards whose leadership almost entirely wiped out the capital of the banking system.
The old system relied on trusting people who lied and cheated. They are still running the show. They will lie and cheat again. We will be called upon to pay the bill, again.
We need a new financial system. We need limited-purpose banking. It should be transparent, trustworthy and unsinkable. The key is to limit banks to their legitimate purpose. Not gambling, but financial intermediation, connecting savers to investors and lenders to borrowers.
Is this possible? Yes, it already exists in the only part of old system still above water – the mutual fund industry. Mutual fund companies like Fidelity, Vanguard, and TIAA-CREF stuck to their knitting. They didn't leverage themselves 30-to-1 and promise things they could never deliver. These companies didn't gamble with their own fortunes or the nation's future. Instead, they bought mortgages, stock, real estate, and other securities. They packaged these assets in mutual funds. And they sold the mutual funds to the public.
The public, not the mutual fund companies, held the securities and took the risk. In so doing, the fund companies ensured their solvency and prevented runs on their funds. They avoided the double jeopardy of conventional banking--- financial shipwrecks that drown both the ships and the public. The one revealing exception was money market funds. There the mutual fund companies promised something they couldn't deliver – that their money market funds would never lose money.
Mutual fund companies also have other safeguards. They use third-party custodians to hold the securities purchased by their mutual funds. This precludes a Bernie Madoff or an Allen Stanford from selling claims to securities they neither owned nor purchased. Mutual fund companies divulge their investments. Whether the assets in their mutual funds are toxic or nutritional, the mutual fund companies say what they hold.
The two things mutual funds can't guarantee are the prices of the securities they purchase or the quality of the securities themselves. This can be improved (but not guaranteed) by compelling disclosure.
The compulsion must come from Uncle Sam. Sam needs to do what we proposed a year ago--- set up a Federal Financial Authority (FFA) to verify, fully disclose, and rate securities, as well as audit the Fortune 500 companies. As we've seen, our private, insider-rating agencies are not to be trusted. Neither is insider-accounting.
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