Within the pages of "The Squam Lake Report"
Title: The Squam Lake Report: Fixing the Financial System
Authors: Kenneth R. French, et al.
Publisher: Princeton UP, 2010
ISBN-13: 978-0691148847, 168 pages
Review: The Squam Lake Report
By Thomas Bergen, getAbstract
This slim volume is named after the isolated New England resort where 15 renowned economists, academics and policymakers met in the fall of 2008 to devise solutions to the "World Financial Crisis." That they convened amid fast-paced, seismic economic events adds to the star-chamber aspects of their collaboration. Still, these éminences grises--all nonpartisan, without commercial sponsorship or political axes to grind--developed their ideas by sharing their expertise. Their recommendations cover reforms in banking, financial products, regulation, compensation, pensions and hedge funds: all the named villains of the last crisis. Why did they issue these ideas? So they could educate political and fiscal leaders (if they would only listen) about possible laws that could help avert or lessen the likelihood and impact of future meltdowns. getAbstract recommends this report to students of and participants in the global economy.
Amid the raging economic storm of autumn 2008, 15 top economists assembled at tranquil Squam Lake, New Hampshire, to construct a series of recommendations. Their objective? To educate and assist politicians and policymakers on financial system reform. The 15 gurus especially wanted to mitigate the negative, "unintended consequences" that well-intentioned legislation often introduces.
Despite the rapid pace of events that fall, the economists focused on long-term issues and their solutions. They analyzed and concurred on nine major areas: banking regulation, financial transparency, pension reform, capital requirements, executive compensation, bank capitalization, moral hazard, and the "shadow banking system" of hedge funds, credit default swaps, brokerages and investment banks. They collaborated on reports, outlining their reasoning and conclusions on each topic. To insert their findings into "policy conversations in real time," they subsequently conferred with members of the US Congress, the Federal Reserve, the European Central Bank, the Bank of England, the Banque de France and other global, high-level government institutions.
Two precepts underlie the Squam Lake recommendations: First, the experts want legislators to consider the impact of reform on financial markets as a whole, not just on single companies. Second, any new rules should put "the costs of failure" squarely on financial firms, not taxpayers. Eliminating "too big to fail" thinking would lead to more sensible risk taking among the firms. Events in the fall of 2008--the US government takeover of Fannie Mae and Freddie Mac; Lehman's demise; the AIG, ING and UBS bailouts--all figured in the global credit shortage. "Fascinating market pathologies" seized up liquidity for banks as well as hedge funds, arbitrageurs and other shadow banking-world operators. The crisis bared four drawbacks to the financial system:
1. "Conflicts of interest": The "highly uncertain future payoffs" inherent in financial transactions mean that traders will assume more risk when they're paid handsomely on good trades, but not made to suffer on bad ones. Shareholders face a similar conflict, or "agency problem," with a firm's managers, who may take undue risk when their compensation isn't sufficiently tied up in shares. Investors discourage troubled banks from raising new capital because they fear the dilution of their shares, resulting in "debt overhang." Conflicts pit financial investors against society's best interests: Healthy financial institutions spur growth and jobs, but failing banks can cause economic breakdowns, so governments rescue them. These "privatized gains and socialized losses" mean shareholders come out whole at the expense of taxpayers. Too-big-to-fail thinking adds inherent risk to the system and chips away at the freedom of capitalist societies...
Click here to read on and receive a free summary of this book courtesy of getAbstract, the world's largest online library of business book summaries. (Available through December 15, 2010.)