Saturday, April 03, 2010
Funny the linked post should talk about the relative effectiveness of regulations mandating transparency vs regulations mandating behaviors.
One of the ideas I've been kicking around (speaking ex cathedra from my navel in my vasty experience with my MS in Econ) has been, with respect to CBOs and their ilk, to do away with all existing regulations and replacing them with regulations to achieve two ends: first, the derivative seller must make easily public the exact arithmetic underlying the derivative, together with comments explaining the major steps and the subtle steps. Those who find arithmetic easy won't need these beyond convenience--and to check the veracity of the derivative developers' claims. Second, all derivatives of a type (e.g., all CBOs, vs all MBS, vs all credit swaps, etc) must be described publicly in standardized terms. An example of this sort of description might be (coarsely) the FDA's requirements for describing prescription drugs.
Then let the public and the free market trade/invest in, or not, these instruments and make up their own minds about the risk/reward ratios. Without the diktats of the Dodds and Obamas, who Know Better and so need to control our behaviors for us.