Thoughtful response, ucodegen. You’ve spurred me to add two further thoughts:
1. I think TBTF does need to be ended, and an increasing capital requirement could accomplish this effectively and efficiently.
You pointed out that entities could game this by having holding companies that run several smaller banks. True, but I think this could be counteracted by combining the controlled entities for capital calculations, much as is done today for taxes.
2. You pointed out that the banks and regulators lost sight of systemic risk caused by broad asset price bubbles (the reliance on the greater fool).
To counteract this for RE, I suggest limiting CLTV to 80%. It’s crude and imperfect, but it’s a big step in the right direction. Limit FHA and VA and other exceptions to no more than 10% of the overall US market in any one year, or 20% of a state’s (or some other rule that makes some allowances for Barney Frank’s goals whilst limiting the system-wide damage he can do to the economy). One more adjustment: Limit the V in CLTV for loan collateral calculations to a long term average. For example, use the average market value over the last 15 years, indexed to price or wage inflation. That way bubbles lose steam very quickly as the down payments increase with the increase in market prices.
