It is a fundamental article of faith in our developed world that a vigorous, free-market-driven economy is essential to a country's long-term international competitiveness and its capacity to generate economic well-being. I would go further and say a vigorous private sector, including the financial sector, is essential for global well-being.

Today, however, this credo is under attack by some who would advocate for a much more intrusive governmental role, as well as by some who cling to the belief that the relationship between government and the private sector can simply revert to the way it was before August 2007.

The reality is that government has taken control of elements of the private sector in ways that would have been unthinkable just two years ago. Constructive dialogue to improve regulation is needlessly difficult when extremes in both camps portray business and government as opposing forces where only one side can really win, instead of acknowledging that there is a "new normal."

This clash is unnecessary and counterproductive. To achieve well-being in the financial services sector and in the world economy generally, we need change. We need the private and public sectors to strive for a symbiotic relationship where balance and mutuality, not conflict, are the watchwords.

Here are elements of a regulatory framework for improving financial stability in the 21st century — a framework that will reinforce a government/private sector symbiosis. Much debate in the coming months will be focused on how to reshape and reshuffle the regulatory boxes, but we must not lose sight of the fact that certain overarching principles must be settled to secure the financial system's stability.

Systemic risk. Today the notion of a "systemic regulator" is in favor. There is much to be said for identifying and mitigating systemically harmful developments in the economy as a whole, as well as in the financial sector. But the focus of the systemic regulator should be macro-prudential issues, not institutional regulation.

Virtually all systemic crises are a byproduct of governmental policies, including bubbles that were fostered or allowed to grow out of control by governmental action or inaction. Focusing a systemic regulator only on the private sector misses the point and could well result in duplicative regulation and an excessive drag on strong firms, sapping credit creation and overall economic well-being.

If we are to have systemic risk identification and mitigation — to my mind, this would be a good thing — the work must be sufficiently independent and elevated that it can speak hard truths to governmental entities, as well as to private-sector participants. One way to accomplish this is through a regulatory council or college approach, which is now being widely discussed.

Regulatory gaps. Regulatory reform can be effective if it focuses on several simple but serious gaps. It should shine a light on unregulated and underregulated entities as disparate as mortgage brokers and hedge funds, which are responsible for a disproportionate part of our recent problems.

Similarly, weak regulation of the affiliates of well-regulated institutions is unacceptable. We must let regulators regulate entire organizations, not just bits and pieces. We must strive to ensure that entities providing similar services are regulated in a similar manner. If we do not, we continually drive the good players further out on the risk curve to compete for capital against the less-regulated ones. In doing so, we create a vicious circle in which the less-regulated entities advance more than they should in an up market but fall precipitously in hard times, dragging better players down with them.

Regulatory professionalization. It is time to elevate the quality of financial services regulation and to professionalize it.

American students can get a college degree in virtually any activity under the sun, but not in safety-and-soundness regulation. Courses in the risk disciplines are needed. This is not to say we lack top-notch people in our regulatory agencies. But we do need to begin taking regulatory education as seriously as we take medical education.

Good, professional regulation should mean smart regulation, and that should mean less burdensome regulation. Professionalized regulation means determining which rules are effective and weeding out bad players and bad practices without overburdening the prudent. Effective regulation should mean healthy, growing and highly profitable companies that properly serve their communities. I am an advocate for establishing as many simple bright lines as possible and applying them uniformly.

Accounting. We need to fix an accounting system that has strayed badly. We need a more thoughtful look at accounting practices and policy generally, and mark-to-market accounting in particular.

It is lamentable that banks were in essence forced by the accounting rules to go into this crisis with insufficient loan-loss provisions, yet we have still not fixed the problem. Financial executives need the freedom to use their judgment to establish their allowance for loan and lease losses, provided the allowance continues to be fully disclosed to the investing public.

Furthermore, we must re-examine our practice of publishing financial statements on the basis of pricing in the market on one set date in what may turn out to be volatile times. Does this snapshot approach really give the investing public a fair picture of a company's economic reality? Why can't we accommodate for swings and give the public a fairer picture of the financial condition of a firm?

To that end, I propose that a national blue-ribbon commission be set up by Congress to review this nation's accounting policies and the governance of accounting standards from top to bottom.

Internationalization. We must be more effective in setting and adhering to international standards. Global financial companies have to deal with different regulations from country to country, and that make running such enterprises more costly and less effective than it should be. Complexity makes the global financial system more fragile.

By harmonizing the creation and application of regulations, we can increase global safety and soundness and the quality of adherence to risk management practices. The quality of rules would improve, and managers would be able to focus on fewer rules. This simplification should increase profitability and wealth creation in a way that benefits consumers and the economy.

Let me conclude with a warning. If we don't work together vigorously, particularly with the serious input and effort of the private sector, we will have a million new, burdensome and ineffective rules rain down upon us. The private and public sectors need to establish an effective dialogue to help advance serious and effective bright-line standards that minimize complication and excess burden but are effective in weeding out loose practices that hurt the consumer and the stability of the marketplace.

A symbiotic relationship between the government and the private sector can be achieved in the regulatory sphere. If we can achieve this, we can have a regulatory environment that increases stability and wealth creation at the same time.

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