I like this short list of fixes from Sheila Bair:
1. Break up the “too big to fail” banks
Giant institutions and untested “living wills” is make financial system unstable. When the Fed is artificially keeping lending rates at near zero, that’s a flaw.
Solution: Make ‘em smaller
2. Publicly commit to end bailouts
“Market must punish the boneheads.” We should learn from post-2008 bailouts is we should never allow ourselves to be in that position again. Wall Street cannot have an indefinite option to “put” its losses to the Treasury and to taxpayers.
Solution: Make penalties for asking for and getting bailouts egregious — wipe out shareholders, fire management.
3. Cap leverage at large financial institutions
“Bank capital levels maybe isn’t a mainstream issue, but it should be;” Limit banks’ abilities to take on risk via leverage or derivatives or whatever the latest “idiotic new innovation” Wall Street becomes infatuated with.
Solution: Go back to firm 10 to 1 leverage rules.
4. End speculation in the credit derivatives market
If arsonists can’t buy fire insurance on someone else’s house, why allow speculation using credit derivatives? Credit default swaps with no vested interested are the same thing.
Solution: Require CDS buyers to demonstrate a specific interest. Even better regulate CDS as insurance products.
5. End the revolving door between regulators and banks
Separating regulators from the regulated is crucial. Ending regulatory capture is key.
Solution: Require longer periods of time between industry and regulator service.