How the Great Credit Squeeze Happened and How to Prevent Another

Transcript

ROBERT LITAN:  Number one, there are those who say, well, financial innovation ran amuck, and we ought to cut back or significantly reduce financial innovation. We don’t take that view in this paper. We think that financial innovation has been good for borrowers and for lenders. It has been good for America. America is the center for financial innovation. But, what we do need are the right rules for innovation so that it gets channeled in a productive way; and in fact, the right rules can make innovation productive, and that’s the purpose of our long-arm reforms.

Second, virtually everything that I’m going to show you can be done by regulation. Very little needs to be legislated.

Number three, we do not recommend that we wait for other nations to act. There is, of course, a global interconnectiveness to financial operations, and that argues for having international standards; however, there are transactions costs and delays associated with negotiating international agreements. This crisis, in our view, does not warrant us waiting another five or ten years, which it would have taken for the Boswell-2 Agreement to be negotiated. We’d rather that the United States go ahead and fix what’s wrong right now.And finally, we ought to be mindful that we are not going to be able to eliminate all financial crises. There will be financial crises. The challenge is to reduce their frequency and their severity.

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