Vocker's Assessment

Here is the one competent economic adviser that Obama has. Here is his assessment of the financial mess. I agree with this.

1. My first point... The present crisis grew out a serious and unsustainable imbalance in the United States and world economies. Specifically, over recent years, until the outset of the recession, Americans spent more than our country produced or was capable of producing at full employment. That spending, reflected in exceptionally high levels of consumption generally and in housing in particular, was made possible by a high level of imports, a collapse in personal savings, and large trade and current account deficits. The consequence was the nation became dependent on borrowing abroad hundreds of billions ofdollars a year. ... The trouble was it could not last. The process came to be dependent upon an enormous build-up of domestic as well as international debt, facilitated by the low interest rates and sense of “easy money”. The bulk of that debt came to be mortgage-related. It was supported by the strong increase in housing prices, giving the illusion of wealth creation. When housing prices leveled off and then declined, the weakest mortgages – so-called subprime – came under pressure, and the highly engineered over-extended financial structure began to unravel. As the financial crisis broadened, the recession was triggered. ...
2. Secondly, I turn to the problem in financial markets. The rising debt, particularly mortgage credit, was facilitated and extended by the modern alchemy of financial engineering. Mathematic techniques that have developed in an effort to diffuse and limit risk turned out in practice to magnify and obscure risks, partly because, in all their complexity and opacity, transparency was lost. Risk management failed. At the same time, highly aggressive compensation practices encouraged risk taking in the face of misunderstood and sometimes almost incomprehensible debt instruments. As we look ahead, the obvious lesson is the need formore disciplined financial management generally and better risk management in particular. ...
3. As the financial crisis evolved, weaknesses in accounting, credit rating agencies and other market practices were exposed. “Fair value” accounting rules were inconsistently applied and have contributed to downward spiraling valuations in illiquid markets. Credit rating agencies failed to analyze collective debt obligations with sufficient vigor. Clearance, settlement and collateral arrangements for obscure derivative contracts created uncertainty and need clarification. ...
4. More directly of governmental concern are thelapses in financial regulation and supervision thatpermitted institutional weaknesses to fester, failed to identify exceptional risks and deal adequately with conflicts of interest, and did not expose large personal scandals after warnings. ...
   

Taken together, the need for change is both obvious
and wide ranging. ...

To help assure their stability and continuity and limit potential conflicts of interest, strong restrictions on risk-prone capital market activities – e.g. hedge funds, equity funds, and proprietary trading – would be enforced. ...

Implicit in this approach is the need for strong cooperation and coordination among national authorities and regulators. Some approaches - accounting standards, capital and liquidity requirements, and registration and reporting procedures - should be internationally agreed and consistent in application to minimize regulatory arbitrage and any tendency by particular countries or financial centers to seek competitive advantage by tolerating laxity
in oversight. ...