The best way to regulate banks IMO, is to give the true owners (a.k.a. shareholders) the legal tools to effectively control and dismiss management if need be. That those who have skin in the game are the most shortchanged in our system is incomprehensible. Even worst, they get blamed for complaining about the situation when their holdings get hammered. How can they NOT complain, given the tremendous leeway management has to obfuscate, spin and transfer all the risks to them while keeping all the rewards?

It goes without saying that I’m very pessimistic about that, given the power of money on federal legislators.

Free markets huh? Give me a break!

http://www.washingtonpost.com/wp-dyn/content/article/2008/04/20/AR2008042001826_pf.html

….

“It’s becoming clear that emotions are very important when it comes to financial decision-making,” said Camelia M. Kuhnen, a Northwestern University finance professor who recently published a study in the journal NeuroReport that found men are more likely to risk money after viewing erotic images. “Both these studies indicate that there’s a mechanism in the brain that allows emotions to influence financial decisions.”

Other researchers praised the new study.

“It’s very important,” said Aldo Rustichini, who studies economics and neuroscience at the University of Minnesota. “It might give an explanation for irrational exuberance and why a crisis changes into a recession or a depression.”

and etc.

I’m very reluctant to reduce social events to biological causes; on the other hand, we are material beings….

For those on the Right who have bemoaned that we have socialized the financial system, I would agree.
It is a done deal. So that some integration of the Board and the Fed seems a pragmatic solution. I would put a Fed Governor directly on each Board.
Rumsfeld talked famously about pre and post 9/11 thinking. He was more correct then he knew. Why I ask myself was there such a strong economic reaction to 9/11. Why then the subsequent orgy of reckless behaviors economically?
I hope it can be seen as a stag party before we leave our youth culture.
We have given in to the calls to give banking the Freedom they have enjoyed.
After all, we have known since the 60’s that Freedom “is another word for nothing else to lose”
I think that independent supervision of Big Banking is entirely appropriate.
plschwartz

Exactly. And one can substitute “uber-regulator” for the Fed; it won’t change anything.

I have had a certain experience with regulators and auditors.

The worst auditors are those validating the banks’ books; they have limited time and you know and they know they are going to validate in the end, so they have no power.

The second-worst are regulators. They have power but they have little knowledge of the products or the environment. They are also often co-opted, angling for better-paid posts in the bank.

The third-worst are internal auditors. Their interest is to find a few superficial things which are wrong, but not anything major (which would bring down holy Hell on them).

Everyone seems to want to know how to control a fire. The best method is not to begin it in the first place.