Economists Say More Regulation NeededA group of economists led by former Federal Reserve Chairman Paul Volcker says that more risk management and regulations are needed in the financial markets to prevent another global economic implosion.
Volcker leads an economists group called the Group of 30. In a report issued on Thursday, the body of top economists calls for tighter regulation of the financial sector, improving coordination of government and international regulators. The group outlined several necessary reforms. Volcker is head of President-elect Barack Obama's special economic recovery advisory board and was Federal Reserve Chairman from 1979 to 1987.
The Group of 30's report says financial markets must be made more transparent. It also notes regulators should be allowed to work away from political influence that could compromise their goals.
Other recommendations include strengthening central banks permanently, not just during times of crisis. They should promote and maintain financial stability when the economy is strong, as the riskiest deals are mostly made during that time.
The report says regulators should focus attention on largely unregulated financial instruments, including credit default swaps, collateralized debt obligations and over the counter derivatives. Regulators have been criticized that they haven't kept up with the complexity of the new investment techniques where questionable deals go unnoticed.
The economists recommend a regulator be established to deal exclusively with non-bank financial institutions and a way to deal with failed non-depository financial institutions. Now the FDIC will take over failed depository bank and guarantee up to $250,000 of an individual deposit through its insurance fund.
The Group of 30 also says the largest and most complex financial institutions should have the most regulation and scrutiny. They should also be not allowed to engage in business posing a high risk to the entire market. This report was a follow up to the group's study in October that found that a lack of appropriate and necessary banking regulation by governments around the world led to the current global recession.
Stocks Gain on Bailout Hopes
Investors helped Wall Street rebound on Thursday, turning around to finish slightly higher on optimism that the government will once again help the financial industry. News of Bank of America's need for more help from the Fed sparked fears of a renewed banking crisis, but the hope of a Senate vote releasing the remaining $350 billion of the financial bailout fund spurred the market ahead. The leading market indicator, the Dow, closed down in the past six trading days. It closed up 12.35 to 8,212.49. Other stock indexes advanced with the S & P 500 up 1.12, to 843.74, and Nasdaq composite moved up 22.20 to 1,511.84.
Congress Releases Rest of $350 Billion
Congress voted on Thursday to release the remaining $350 billion in bailout funds. The vote came after President-elect Barack Obama said he will commit to use as much as $100 billion of the $350 billion to help homeowners facing foreclosure.
Democrats also proposed spending increases and tax cuts of $825 billion to help the economic recovery. The goals of the separate stimulus legislation are immediate and continuing job creation. The legislation would offer tax cuts for businesses and individuals and also put money into health care, energy, education and highway construction. Obama has called for swift and decisive action to stop the economic freefall the country is experiencing.