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Expert Panel Advises the Next President on Fixing Global Finance

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As President-elect Obama transitions into the White House, experts from the Council on Foreign Relations, The Economist and NYU Stern debated the current global financial crisis with a focus on ways to repair a broken economy. Entitled "Transition 2008: Advising America's Next President," this is the first of three events that address global issues as they relate to the US presidency.

The panel included Greg Ip, US Economics Editor, The Economist; Brad Setser, Fellow for Geoeconomics, Council on Foreign Relations; and Roy Smith, Kenneth Langone Professor of Entrepreneurship and Finance, NYU Stern. The discussion was moderated by Thomas Cooley, Dean of NYU Stern and a macroeconomist.

Greg Ip: "Address the ad hoc mechanism that exists in the government's response ."

In the short-term, Greg Ip believes it is important to create a formal legal authority by which the government can take over any company of systemic importance that is in financial trouble to pay off creditors and wind the company down. In the long-term, Ip suggests a stricter form of regulation: one that limits the risks that bank holding companies can take. He also advises rethinking the oversight responsibility for these institutions.

Brad Setser: "Taxpayers have not realized that they are on the hook on the downside."
Brad Setser notes that the G7's commitment that no systemically important institution will fail puts taxpayers on the hook to bail them out. Even with no taxpayer money on the line, banks should evaluate their capital before considering paying dividends. Regulators should be evaluating whether their equity capital could be better used to protect the taxpayer. He advises President-elect Obama to quickly evaluate if the $700 billion bailout is enough.

Roy Smith: "Let General Motors go bankrupt."
Roy Smith advises Obama to heal the real economy by finding items to remove from the budget in order to contribute to spending what's needed to get things going; to intervene in the markets to get them flowing again; and to not bail out General Motors.

Thomas Cooley: "Explain the rules of the game."
The current regulatory system has been suspended. Thomas Cooley stresses the need to figure out the rules of the game and a way to articulate them so that market players can know what to expect moving forward. He also explains the need to include additional pieces in the regulatory architecture and the need for better ways for firms to calculate risk.