Banks need fixing and capital markets need fixing. There's no debate about that.
Still, there's plenty of debate about what to do about it and too little agreement on exactly what to do about systemic issues, both in domestic and global markets.
But there is a solution – one so simple that if effectively implemented, market volatility will ease and investing will be more rewarding than day trading.
It could be dressed up in a lot of different ways, but ultimately it comes down to two things: transparency and uniformity.
We need transparency in the financial markets. After all, the murkiness of the derivatives market and other complex financial innovations played a crucial role in bringing down the entire global economy in the first place.
Nothing is workable if it's not transparent. Transparency has to be at the root of every resolution, of every solution, and in the construction of every fix to every issue.
Keep that in mind, because a lack of transparency is currently what's missing and what continues to hamper any workable solution to the problems we've been trying to tackle.
Specifically, when it comes to banks and capital markets, it's the lack of transparency that got us into the mess in the first place, and only by hammering ineluctable transparency back into our financial system can we ever climb out of our deepening hole.
We need transparent, globally agreed-to and enforced financial accounting standards and transparent, globally agreed-to and enforced bank capital requirements and regulations.
Transparency and Uniformity
The good news is we're already taking steps to fulfilling these two critical goals.
The Securities and Exchange Commission (SEC) has promised that by the end of this month it'll decide on whether U.S. companies will be able to abandon Generally Accepted Accounting Principles (GAAP) for International Financial Reporting Standards (IFRS).
Right now, most Group of 20 (G20) nations embrace IFRS, which are standards drawn up by the International Accounting Standards Board. But in the United States, most companies, including banks, use GAAP accounting mandated by the Financial Accounting Standards Board (FASB).
FASB rules have been the predominant set of standards adhered to in the United States since 1973. The FASB is overseen by the SEC, which has final authority over listed companies' accounting rules but defers to the FASB almost all the time.
It's not worth arguing about variations between the two sets of standards. All that matters is that we have one set of accounting rules for every person, every company — and especially every bank.
Of course, those rules should make transparency their number one goal. We need to agree on exactly how to account for derivatives and counterparty risk. We need to agree on how to risk-weight assets, and how to mark them and every other attendant accounting rule vital to transparency and gives regulators, analysts, and investors an apples to apples comparison of companies – especially banks.