The financial system will continue to be a drag on economic growth because no one trusts it, and, for good reason.
Whether or not capital requirements are doubled or tripled, financial firms can, at any time, use the cover of proprietary information to manufacture and sell fraudulent securities. This means that there can be runs on banks, insurance companies, hedge funds, etc. at any time based on rumours, whether true or not, of fraud.
This fact that we can't see in real time and on the web what these companies are doing with our money makes the system incredibly fragile.
Dick Fuld, CEO of Lehman before it collapsed, said what happened to Lehman could happen to any bank. He's right. But his statement also means that Lehman wasn't to be trusted and that no surviving financial intermediary should be trusted.
Unfortunately, regulators, raters, boards of directors, and politicians aren't going to look carefully at what these companies are buying, holding, and selling, and protect investors. Their incentives are to do the opposite.
If we want to get our economies growing, we need to adopt Limited Purpose Banking (see my worst-selling book, Jimmy Stewart Is Dead, which has been endorsed by an absolutely incredible list of people, starting with former Treasury Secretary George Shultz and economist Jeff Sachs, and which I very much hope you will read), which forces all financial corporations to operate as mutual fund holding companies and provides for the full and highly detailed disclosure, in real time, of all the assets and liabilities of the mutual funds.
If you like the book, send it to your favorite member of Congress. We need them to start thinking out of the box if we are ever to truly fix our financial system.
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