'Brain Trust' Needed to Oversee Capital Markets
Wednesday, September 24, 2008
DURHAM, NC -- With the capital markets in crisis, it’s time to harness fresh, unbiased ideas from academics and experts with market experience, says a Duke University professor of law and business.
“If the government had strategically purchased mortgage-backed securities at the outset of the financial crisis to stabilize financial markets, today’s credit collapse would have been avoided or lessened in impact, and we would not now be facing $700 billion, or more, in taxpayer expense,” says Steven L. Schwarcz, the founding director of the Duke Global Capital Markets Center. “The government failed to take the right action because it lacked meaningful outside perspectives.”
Current regulatory approaches were set up when banks and institutions were the primary source of corporate financing, he says. That approach is insufficient now that companies obtain much of their financing directly through the capital markets.
“The current crisis stems from loss of confidence in the capital markets, much of which is tied to increasing market complexity on a number of critical levels, which in turn causes unexpected consequences from otherwise routine and desirable actions,” says Schwarcz, the Stanley A. Star Professor of Law and Business at Duke.
Any approach to regulating capital markets requires oversight by scholars and experts in the field -- not the traditional expertise found at the Federal Reserve and the Treasury. Such an oversight body could function, formally or otherwise, by having access to government regulators, at all levels and branches, to suggest ideas and to critique proposed government actions -- a type of advisory group or “brain trust.”
President Franklin D. Roosevelt took a similar approach in response to the Great Depression. One difference, adds Schwarcz, is that because capital markets cross national borders, any brain trust should include at least some foreigners.
“If the government attempts to solve the financial crisis without this type of critical input, the solutions will continue to be makeshift, illusory and costly,” he says.
