The cover The Economist this week gives a humorous take on the Rube Goldbergesque nature of the global financial markets.

Unfortunately, as has become all too apparent in the past few months, the situation in the U.S. and around the world is anything but funny.  In February 2006 the U.S. Chamber released a report "Capital Markets, Corporate Governance, And The Future Of The U.S. Economy" which concluded: "People think that capital markets only matter to the rich and that the system has always worked well to move the economy forward. Neither assertion is true. Our capital markets have not always worked well and, in the end, the average citizen paid the price. 1929 is the most vivid example of the effects of capital market mismanagement, but there are many others." Many others indeed.

To develop best practices for proper capital market management we organized the independent, bipartisan "Commission on the Regulation of U.S. Capital Markets in the 21st Century" led by William Daley and Arthur Culvahouse. The Commission issued its "Report and Recommendations" in March 2007 setting forth a series of measures to better protect investors and promote capital formation.

To build on the good work of the Commission the Center for Capital Markets Competitiveness (CCMC) was formed.  In March of this year the CCMC presented an action plan designed to: Establish a modern and coherent regulatory structure; Restore fairness to legal, regulatory, and enforcement processes; Implement a global corporate financial reporting model; Promote innovation and the long-term interests of all investors. 

Around the same time Secretary Paulson issued his "blueprint" for overhauling the rules and structures governing our financial markets. Critics derided the long-term nature of the plan completely missing the point. As military historian S.L.A. Marshall once wrote:

Great battles, like epic tragedies, are not always staged or the product of human calculation; and disaster is less likely to derive from one gross blunder than from reasoned calculations which slip just a little.

The current U.S. regulatory structure is deeply rooted in the reforms put in place in the 1930s, a period that was closer in time to the Civil War than it is to today.  With every minor crisis more band-aids, patches, layers, and duplicative controls were added. These "reasoned calculations" have slipped quite a bit; our current system is patchy and confusing and we have regulatory management which both mismanages that which it covers and "miss manages" that which it should cover. 

And yet the cry today is for more, more, more of the same.

But just as "short-termism" in the markets negatively impacts companies, "short-termism" in regulation will, again, negatively impact the markets. We need comprehensive reform and we need to build a comprehensive, dynamic, regulatory system to ensure that our economy can continue to grow and create jobs.
 
To advance these objectives, the CCMC has released today and strongly encourages the next administration to incorporate the following principles in their overall regulatory reform:

1. Promotion of Economic Stability, Efficiency, and Growth
 a) Appropriate Capital and Liquidity Requirements for All Market Participants
 b) Responsible Innovation

2. Management of Systemic Risk

3. Internationalization

4. Comprehensive Regulation and Oversight
 a) Elimination of Regulatory "Dead Zones"
 b) Elimination of Regulatory Duplication and Remove Layering
 c) Forward Looking Regulation

5. Increased Transparency
 a) Transparent, Timely Reporting and Data Sharing
 b) Regulation of the Credit Ratings Agencies

6. Investor Opportunity, Capital Formation, and Consumer Protection
 a) Strong Consumer and Investor Protection
 b) Support a Pro-Capital Formation Tax Code
 c) Rational Litigation Systems

7. Sustaining and Enhancing Financial Reporting

Get details on the principles at the CCMC.