For example, it has been argued that “systemic” financial institutions should be more closely supervised and be subject to a more stringent set of regulations. How exactly to define systemic institutions, and who should deem an institution systemic is far from clear. Closely related reforms are those aimed at reducing interdependence and, therefore, the systemic nature of institutions. The push towards central counterparties, in particular for derivatives, falls in this category. The second category of reforms encompasses those directly related to the specifics of the subprime crisis. I would like to offer some comments on these issues. In particular, I would like to comment on a) accounting methods; b) liquidity; and c) rating agencies. Accounting methods and valuation At the onset of the financial turbulences, there were strong concerns on how precise was the information reported by banks, how large were the losses, and who was bearing these losses. This uncertainty was a critical factor in the shutdown of key financial markets. The International Accounting Standards Board (IASB) and the Financial Stability Board (FSB) have been working and promoting recommendations on accounting and disclosure standards for off-balance-sheet investment vehicles, and fair value methods, among others. However, these “information” requirements by themselves are not enough, and other measures could be necessary, such as forcing originators and other agents to hold part of the risk of the assets created. Liquidity The current financial turbulence has highlighted that for the banking sector liquidity considerations are as relevant as solvency issues.

As Arrow and his team reviewed these  3  See “Little Hiring Seen by Small Business,” by Siobhan Hughes, Wall Street Journal, July 11, 2011  4  See Small Business Economic Trends survey, National Federation www.nfib.com/research-foundation/surveys/small-business-economic-trends. 5  See the Federal Open Market Committee meeting calendar, www.federalreserve.gov/monetarypolicy/fomccalendars.htm. BIS central bankers’ speeches  of  Independent  Business,  3  predictions, they confirmed statistically what you and I might just as easily have guessed: The Corps’ weather forecasts were no more useful than random rolls of a die. Understandably, the forecasters asked to be relieved of this seemingly futile duty. Arrow’s recollection of his superiors’ response was priceless: “The commanding general is well aware that the forecasts are no good. However, he needs them for planning purposes.”6 Keep Ken Arrow in mind when you hear economists tout precise forecasts carried out several places to the right of the decimal point. You may need economists’ forecasts for planning purposes, but you should always take them with a grain of salt, even when the time horizon is a short one. I will direct you to an article in the Feb. 14 Wall Street Journal as evidence. The Journal had polled 51 leading economists, and they forecast that gross domestic product (GDP) would expand 3.6 percent in that very same first quarter.7 Growth came in at 1.9 percent. When economists forecast we will have growth of, say 3.6 percent, remember they are saying .036.