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Markets Need More Discipline?

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  • Description

    Mark Calabria of the Cato Institute explains why the markets don't need more regulation.

  • Duration 3:06
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-- a Denis thanks very much Jamie.

Let's talk regulation nation you know Goldman Sachs chairman Lloyd Blankfein seems to be drinking the -- -- He's just talk -- banking regulation higher capital ratios -- a necessary evil.

But mark Calabria director at the Cato institute at what's needed is more market discipline not.

He joins us now thanks for being with us -- police -- One risk of higher capital ratios and all this actor regulation is actually the banks wind up increasing their risk rather reducing it please explain how that could be true.

Well this ticket buyers -- this -- need to be concerned about first.

When you talk about capital regulation you have all these risk based capital standards and -- -- -- weighting to things like Greek debt granite -- that's changing.

But the higher -- you make the overall capital the greater the incentive is to hold zero or very low ratings and of course.

That's why the assets that got -- in the problems mortgage backed securities here and sovereign debt in the US for the things that considered most safe.

So again by increasing the overall capital standards.

If you don't change the way means you actually make it more attractive to heard in the same assets as well right and of course I think one of the complaint one of the -- -- that.

If we -- everybody the same way we regulated -- the same way and everybody responded the same shocks the same way.

And so I would that's cut thousands of pages of new regulation -- -- want to thank you but you say Dodd-Frank really is not addressing the things that got us into the meltdown.

-- -- I -- look at say the bubbles ever created by monetary policy arena Freddie and Fannie your merely mentioned in the bill.

We argued anything about the heavy -- seen our tax code towards debt.

It's not a reason it's not surprising that banks -- corporate still highly leveraged surprise that the robbed more leveraged.

When you tax equity you subsidize that the tax code so I think we move to a system where the tax code was equity debt neutral.

We move to a system where creditors -- rest because ultimately the market should determine how much equity you have to have.

Because if your mismanaged.

Your poorly run you got a bad business strategy people should charge you more than what you money and that's not the situation we have certainly.

The bigger Freddie Freddie got that -- did she really could borrow it again we've created that same sort of situation -- largest banks aren't what Lloyd is yes.

This hands off approach.

Was cut there and 0708.

And Wall Street -- they were stupid clueless greedy.

What what is it.

What a lot of arguing for is not a hands off approach our -- for the market to regulate you because your creditors -- shareholders everybody else at risk what I'm talking about is replacing what I see is weak incentives.

Because not one regulator has lost their job despite many of them had tons of discretion.

But you know they have so there fairly we -- -- actually monitor institutions.

Where is people who have millions or billions of dollars that risk -- institution of very strong incentive to monitor so what I'm talking about is we bring all of these people were very strong incentives.

Can you give them an incentive to look at these institutions to -- these institutions accountable.

Obviously the ultimate accountability as you go out of business this is the third time we've -- out Citibank.

How many more times is going to be necessary -- these institutions have a bad culture need to go away when they fell -- to wrap it thanks very much mark Calabria of Cato Institute.

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