To make a more purely political point on Larry Summers, I felt a helluva lot more confident after his speech than after any of Tim Geithner's addresses. That may be because Geithner gets the scut work -- an actual proposal that can be picked apart -- while Summers gets to talk theory, but there it is.I also wanted to highlight a section from the latter half of Summers' speech that didn't fit into the earlier post. in it, he details the administration's agenda going into the G-20 conference. "There is room for debate about how regulation should be enhanced," he says, "but not about whether we can stay with the status quo. Treasury Secretary Geithner will be laying out the Administration’s approach in some detail in the coming weeks and the President is eager to take this issue up with his fellow leaders at the April G-20 meeting. While the discussion can get pretty technical quickly, some things should be clear":* Regulatory agencies should never be placed in competition for the privilege of regulating particular financial institutions.* Globally, the United States must lead a leveling-up of regulatory standards, not as has happened all too often in the recent past, trying to win a race to the bottom.* No substantially interconnected institution or market on which the system depends should be free from rigorous public scrutiny.* Required levels of capital and liquidity must be set with a view toward protecting the system, even in very difficult times.* And there must be far more vigorous and serious efforts to discourage improper risk taking through transparency and accountability for errors.The two points that say something concrete are the first and the third. Summers has now signaled that the administration means to regulate the ratings agencies and the leverage requirements.Rating agency reform topped the list. Summers is calling for an end to the current buyer's market for ratings, wherein the agencies bid for the business of the banks, which creates a powerful incentive to return results that the banks like. If you're the one rating agency slapping "worthless" on packages of bonds and making it impossible for a bank to trade, no one will use your services, and you'll go quickly bankrupt. Various experts have suggested a variety of reforms including randomly assigning ratings agencies to firms and even taking the whole process public. For a good article on this, read Roger Lowenstein "Triple-A Failure," which stands as one of the best pieces of analysis to come out of this whole mess.Summers is also arguing for stricter capital and liquidity requirements, meaning they're going to regulate leverage (which is to say, force banks to keep more money on-hand). I don't know how you decide the level that "protects the system" if all the banks go down, but it's certainly lower than where it's been set in recent years. Either way, these two issues -- ratings and leverage -- are, in the estimation of many experts, the key to the crisis. Learning that the administration is already focusing on them and is even hoping to use the G-20 to coordinate international regulatory action is the sort of thing that makes me, well, more confident.
