Wednesday, October 1, 2008

Financial crisis discussion kickoff

The current U.S. financial crisis was caused in large part by poor corporate governance and poor democratic governance, so voter funded media reforms can help prevent such disasters in the future. Meanwhile we have to solve the immediate problem of how to achieve short-term and medium-term stability of the financial system. (“We” includes the U.S. government, U.S. voters and people who think about political/economic systems.)

Although my work for the past 12 years has focused on governance (corporate and democratic), before that my specialty was investments: financial economics, derivatives arbitrage, risk measurement and control etc. I worked for Salomon Brothers (now part of Citigroup) and Merrill Lynch (now part of Bank of America) in New York and Tokyo. Before that I was assistant professor of finance at U C Berkeley – see

Thanks to my interest in Japan, I have already spent some time thinking and writing about how a leveraged financial system can overcome the dislocations caused by falling real estate prices. Japan went through that in the 1990s, and took more than 10 years to recover. In 1998 I started writing a paper entitled “How To Transform a Failed Japanese Bank”. I only wrote 4 pages and never published it, but in 2000 I published a summary in section 6 of “Corporate Governance in Japan: A Future Scenario”. Both papers are available at

Rereading those ideas, I think they can be usefully adapted as proposals for solving the current U.S. crisis. So in the coming days and weeks, I plan to post my updated proposals in this blog. I’ll flag them with the tag “Financial System”. I hope you readers of this blog will contribute your ideas, links, questions etc.

Here’s a question for you: Do you know of anyone discussing the idea of eliminating the tax penalty on equity to encourage larger equity cushions in financial firms? This issue has been around for decades, but is anyone raising it as a cause and partial solution for the current crisis?

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