Transcripts

"Money File"-Regulation & Recovery

SUSIE GHARIB: In the "Money File" tonight, the role of regulation in reviving the economy. Here's Eric Schurenberg, editorial director at Bnet Moneywatch.

ERIC SCHURENBERG, EDITOR IN CHIEF, BNET MONEYWATCH: After the great depression, Washington and Wall Street sat down and fashioned a new regulatory system to restore confidence in banks and capital markets. It worked. In fact, it kept going 60 years until it finally broke down in this crisis. We need something like that again. It seems to me that a few principles ought to be followed. First, accountability. If you take the risk, you take the hit. Wall Street firms used to be partnerships, in which partners risked their own capital. Financial enterprises today are run by managers. If they gamble and win big, they get rich. If they lose, the shareholders get wiped out. If Lehman and Bear and Merrill CEOs stood to lose their own money, would they have gambled on toxic loans at 30:1 leverage? Second, acceptance of uncertainty. The problem with sub-prime loans wasn't so much that they were made. It was that investors believed they were safe. They believed it because credit rating agencies said so. Washington blamed the credit rating agencies last year, but Washington created the situation by making them official arbiters of credit risk. In effect, Uncle Sam decreed such firms could see the future. They couldn't. Finally, balance. Markets exist because regulations can't possibly keep up with change. Regulations exist because markets inevitably give in to emotional folly. You need both markets and rules because circumstances always change and human nature never does. I'm Eric Schurenberg.