Thursday, June 3, 2010

Fama on Financial Reform

Gene Fama, one of the fathers of Modern Portfolio Theory, expresses his view on financial reform. Personally, I've seen little evidence that regulators are capable of regulating the industries they are supposed to police, and don't place much faith in the financial reform bill in Congress. I think 1,400 pages of law is way to complicated and unenforceable. The new bureaucracies that are created will be just as ineffective as the old bureaucracies. The bill itself should be much simpler and rely on much higher capital standards to enforce discipline. The implicit promise of bailout nation needs to come to an end, and companies should be allowed to fail based on their own foolish decisions and miscalculations. The failure to address Fannie and Freddie in this bill is a major shortcoming, and until those companies are wound down, or sold off and detached from the government and mortgage standards raised we still live in a world exposed to irresponsible underwriting.


  1. Very interesting interview. I often wonder how it is that we have all these reasoned voices laying out some very basic steps to fix our problems and yet the laws we get are so convoluted that legislators don't read the bills, don't understand the legislation and end up passing garbage.
    Fama and many others are exactly right - raise the capital requirements. Shouldn't that be easy? Right away it lessens the "too big to fail" issue by ensuring these institutions have a cushion.
    I wish all the personal finance bloggers out there could listen to Fama's talk on market efficiency. So many don't understand it.

  2. I'm all for simple, straightforward and clear when it comes to laws and regulations as opposed to some of the Byzantine stuff we have today and in the process of creating. Raising capital requirements significantly from today's levels seems like a elegant and inexpensive solution.