FSA say 'more capital, less risk'
From about the mid-1990s to the autumn of 2008, the dominant model of how to run a bank was based on three very silly ideas:
1) there would never again be a severe economic recession;
2) markets were rational and perfect, so financial innovation was always benign;
3) greed could never cloud the judgement of bankers.
Then Lehman Brothers collapsed, most of the world's biggest banks found they couldn't survive without some form of help from taxpayers, and a global slump was caused by a collapse in the provision of credit on a scale we haven't witnessed for 80 years.
To state the bloomin' obvious, we mustn't ever be fooled again.
Today we have one blueprint of how to make the global financial economy safe for us to swim in again.
It's from the Financial Services Authority, the City watchdog, which didn't do a particularly sterling job in averting a meltdown of the financial system, but characterises itself as just one of the many victims of a failed ideology.
Here are the remarks of its newish chairman, Lord Turner, who doesn't feel personally implicated by the sins and omissions of the FSA's past (although he worked for one of the banking sinners, Merrill Lynch, for a few years):
"The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets. Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective."
Or to put in another way, big banks can make big boo-boos. Doh!
This morning the FSA has published a chunky programme of reform of how it behaves and how it regulates financial firms, and - as important - proposals to change the very important supra-national rules that constrain banks' activities.
Much of what it wants will be seen by many - especially those old enough to have lived through a few economic cycles - as simple common sense.
And some of its gleaming new rules would in fact represent a return to a framework for limiting risk-taking by banks that prevailed until comparatively recently.
For example, in the stuffy old days of the 1980s, banks would routinely tuck away capital for a rainy day - for a possible rise in defaults during an economic slowdown - by making "general provisions" during the good years.
Guess what? The FSA thinks that a return to something like that - what it calls an "economic cycle reserve" - might be a jolly good idea: bankers of a certain age will allow themselves a wry smile.
In general the FSA's plan can be summarised under a small number of headings:
1) it wants banks to hold a great deal more capital as protection against potential future losses;
2) it wants banks to hold a great deal more cash or liquid instruments as a protection against a drying up of finance;
3) there should be much better monitoring of credit conditions in the economy as a whole, to assess whether a dangerous boom is being stoked up - and the monitoring would be carried out by the FSA, the Bank of England and the International Monetary Fund;
4) there should be a new power to increase how much capital banks are obliged to hold relative to their loans when the economy is doing well, to put the brakes on lending before indebtedness increases to dangerous levels;
5) bankers' pay should be "designed to avoid incentives for undue risk taking";
6) banks should be deterred from taking excessive risks in the trading of securities and investments, by making it much less profitable for them to do so (this can be done by forcing them to hold more capital against their trading books);
7) a new European institution should be set up that would be "an independent authority with regulatory powers, a standard setter and an overseer in the area of supervision".
There is a good deal more. But those are the big points.
One of the FSA's more contentious conclusions is that it's not "feasible" to separate retail banking - or banking for individuals and small businesses - from what it calls "market making" activities.
Some have called for such a separation, because in theory it would protect the important payments system and the deposits of ordinary people from what the governor of the Bank of England calls "the casino trading of an investment bank".
Strikingly, Mervyn King - the Governor - said only last night that "we need a public and informed debate on the merits of the arguments".
Presumably he won't be pleased that Lord Turner apparently regards such a debate as futile.
Lord Turner does however want there to be a debate on a number of other resonant questions.
Should the FSA regulate financial products in a much more explicit and detailed way?
Should it for example instruct banks that they shouldn't ever provide mortgages equal in value to more than a certain percentage of a relevant property's value or to more than a certain multiple of the borrower's income?
Should it prohibit investment banks from marketing products even to sophisticated professional investors that are regarded as too complicated or potentially dangerous?
And if it weren't to do either of those things, should it have a toolkit of "counter-cyclical" powers that would allow it - for example - to temporarily prohibit 100% mortgages, as and when the housing market is overheating (yes, that will happen again, one day).
There's a good deal to chew over.
But as Mervyn King said last night, there's probably no great rush: we have to get through the global slump first before it becomes a matter of urgency to protect ourselves from the dangers of the next boom.
UPDATE, 14:00: Lord Turner's proposals to make the financial economy safe again will have quite an impact on Britain.
They will lead to a permanent reduction in the amount of credit provided by banks to households and businesses - because banks will be able to lend a much smaller multiple of their capital resources than they have been doing over the past few years.
That will mean that the UK becomes less of a debt-fuelled economy.
Which many would see as a good thing. Because on most measures, households, businesses and the public sector have all borrowed too much over the past few years.
But we shouldn't pretend that this change in the structure of our economy will be free of costs.
For a good few years, and when the recession is over, our growth will almost certainly be lower than it has been.
And there'll be a second drag on growth.
The FSA is imposing big new burdens and expenses on financial innovation - because so much of the innovation of the past few years, especially the alchemy of turning subprime loans into gold, turned out to be toxic.
But, again, the City of London was a world leader in this innovation. So less of it - and there will be a lot less of - will mean a smaller City.
Which many would describe as a price worth paying. But we shouldn't pretend that there will be no price at all for sanitising global finance.