Rogoff on International Financial Regulation

He doesn't think executive compensation is the main problem:

[T]here's no one-size-fits-all solution. It's hard not to be sympathetic to that, and clearly we've shown that a lot of the financial firms are effectively public entities with trillions of dollars of cash at their disposal. On the other hand, it's sobering to note that the European banks, by and large, did not have these huge, American-size payouts. Yet they managed to get themselves into just as much trouble. The short-term borrowing is the real problem.

By "short-term borrowing" he really means huge leverage ratios that require banks to roll over their entire net worth many times per month. When credit is flowing, that's not a problem. When it isn't, we get the Great Financial Meltdown of 2008. Along similar lines, Rogoff also wants higher capital requirements, particularly for short-term borrowing by banks. In other words, Rogoff sees the problem as fundamental to the structure of banking: banks borrow short and lend long. He's right, but that feature will always be with us. The trick is figuring out how to limit the systemic risk.

Rogoff also has thoughts on the difficulties of international harmonization:

Also, the undercurrent is the United States makes a lot of money off of international finance. It's a big profit center -- we are the winners, and we want to keep the system. The rest of the world says, "But you're generating risk." We have a very different agenda from, say, Germany or France. They will have much less to lose by strengthening regulation because they have much stronger regulation to start with.

It's not just the U.S.: the U.K. and Japan also make a lot of money from finance, and Japan in particular does not seem interested in jacking up capital requirements. Nor is it clear that that would have prevented this crisis or would prevent the next one. Indeed, stricter capital requirements in Basel incentivized banks to take on more securitized loans since those had a lower risk-rating than the unsecuritized debt banks were previously holding.