Economic leaders around the world are seized with chastising the financial community for their excessive risk taking. They want to put caps on traders’ bonuses and other compensation and tie these to performance. I keep saying that it would be better to make the markets for structured products, e.g securitized debt, mortgage backed assets, collaterallized loans, credit default swaps and such, more transparent. These trades have been done directly from one person to another, what one writer referred to as, “consenting adults selling in private transactions.” As I pointed out, the importance of keeping these trades private is that the seller does not reveal what he makes on the deal and is therefore free to charge what the traffic will bear.

If these investments were sold on an open market they would be clear for all to see - price, fees, composition, risk, and more. This would prevent mistakes in valuations and put downward pressure on fees. It would also allow the authorities to monitor the markets and take action to correct them before they grow too large. Again, the Church of England has made the same appeal to authorities.

I also said that proof of my statement that securitized debt had been devalued by quantum factors not merited by the actual loan default and foreclosure rates was the fairly rapid repayment by banks of funds they accepted from the TARP program. However, I failed to connect this to lifting the “mark-to-market” rules. The Feds did not use the TARP to buy “toxic assets” but to inject capital into bank balance sheets in exchange for preferred shares. They recognized the long term value of the securitized debt, so let the banks keep them, while beefing up their balance sheets. This, combined with lifting the “mark-to-market” rules, allowed the banks to make their balance sheets whole and, in turn, pass the bank “stress test.”

Now I offer as a solution that each bank set up a “reserve account” with the Feds in which they will hold all required reserves for their lending and investment activities. Instead of the Feds having to inject funds into the banks themselves when they are too short, the Feds would simply put funds into the bank’s reserve fund with the Feds. The bank would be expected to repay this “loan” as soon as possible.

Beside making it easier to provide bank balance support in a crunch, this system would also give the Feds complete information on the banks’ transactions, since they would hold the banks’ reserves. The banks would have to report their lending and investment positions in order to establish how much to hold in their “reserve accounts.”

Transparency, through holding all bank reserves in accounts with the Feds or other means, would prevent incorrect valuations of assets, as well as put downward pressure on bank fees. Sounds like the right elixir to me.