It is time for people to think about how to rebuild the global financial system. Do not rely on the old experts, who build the old system based on financial engineering, greed, free market and dishonesty. They have led to the collapse of the system and loss of life savings of many ordinary people.
When Lehman Brother collapsed, it had debt of 30 times of equity. The debt is funded largely by short term credit, which has to be rolled over every 30 or 90 days. Many hedge funds have similar funding structure. When the credit could not be refinanced, they had to sell shares and bonds at any price, leading to the collapse of the markets.
The size of the unrglated credit default swaps (CDS) is USD 50 trillion, more than twice of the global stockmarkets!
The new financial system should, in my view, be build on the following pillars:
1. Stronger regulation
2. Regulated companies, e.g. financial institutions and listed companies, should have debt of not more than 1 time of equity, and it should be funded by bonds of at least 5 year duration.
3. Deriviatives should be regulated and traded on exchanges
4. Complex financial products, build by financial engineers, should be banned
The experts will argue that the "risk based capital" approach can help to prevent the collapse. I agree with this approach, but it has to be considerably simplifed.
We will have a simpler financial world, but a safer and fairer world. There will be less multi-million dollar jobs for financial experts, who milk the old, now collapsed, financial system.
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