Monday, March 29, 2010

Economic View - In Financial Regulation, Recognize Our Limitations - NYTimes.com

From yesterday's New York Times.

I like Professor Mankiw's idea (towards the end of the piece) of a sort of convertible debt obligation that would act as a brake on institutions that are overleveraged:

MY favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance.


The beauty of the proposal is its simplicity, I think.

Economic View - In Financial Regulation, Recognize Our Limitations - NYTimes.com