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William McNabb


CEO, The Vanguard Group, which manages more than $1 trillion in assets

From my perspective, what jumps out is that trade capital has to be able to move freely with a caveat around fairness and transparency. At a macro policy level, we really need to step back and better understand the evolving competitive nature of the world. It's not perfect, but I think [19th century economist David] Ricardo's comparative advantage makes sense right now. It's never been clearer how well some of those ideas hold up. If you step back and look at the U.S. competitively, our strengths have been a commitment to free markets at the macro level, the decentralized and highly specialized nature of the domestic economy, the ability to innovate, a superior higher-education capability, and if you believe any or all of that, if you are looking at policy going forward, does all of that still hold true? If it doesn't, or the U.S. is threatened competitively, what do you do about it? It gets you to hard questions about education, as well as a hot topic, our immigration policy. It all comes down to understanding our comparative strengths vs. the rest of the world. It is much like basic competitive strategy; that's a high-level macro look.

Recessions do happen. There is an absolute obsession with "Can we eliminate business cycles?" But business cycles are natural. No one likes to go through a recession or downturn, but it usually ends up being a cleansing event. Our economy can come out of any downturn stronger if it responds properly.

One of the great debates going on is, What is the appropriate balance between regulation and free markets? A fear in all of the discussions is that we create a pendulum where we go too far in one direction or another. There are those who argue that we are on the free market axis, and we need to have a more regulated economy.

I don't know if more regulation is the right answer, but we need better regulation, specifically regarding financial services. I'd love to see a task force [aimed at] rethinking the regulatory oversight framework. What I hope would come out of it is a proposal to oversee the entire financial-services industry holistically, as opposed to the silo fashion of regulation that exists today. Securities, commodities, insurance, banking, mortgage banking, mutual funds, derivatives, and dare I say, hedge funds would all be looked at holistically

One of the things the current situation brought out is how siloed regulatory bodies have been, and how much intersection there is between different sectors of the financial-services business. Here are some high-level principles I hope might come out of a task force:

1) An entity that would oversee the broad financial-services industry. I hope it would be insulated from the political process; otherwise problems arise. It can be done.

2) I want an entity with a commitment to formal and informal engagement with the regulated community. One of the positive things here is that I give the Fed and Treasury a lot of credit for trying to reach out and talk to people asking: What are you seeing? What is going on?

3) The Fed historically is there for monetary policy; obviously it has a big stake in the banking system. To the Fed's credit, they are trying to understand the mutual fund perspective on all this. If you think about it, money-market funds lend $3 trillion to corporations and government entities. In a sense it's a shadow banking system. Not understanding the changes between money-market funds and the banking industry could be dangerous. The Fed stepped into this void, as has Treasury. They asked a lot of really good questions. That formal process is really important, but so is the informal dialogue.

4) This is maybe most controversial: the "do not harm" principle. Any regulator should be thinking about setting guardrails and not getting into how to change the oil of a car. That assumes you accept that markets broadly can work, and can lead to the right results. They can, if there are proper guardrails in place.

5) This is something we've gotten away from and is part of the problem: Prevention first, enforcement second. After the scandals in the early part of the decade and the tech wreck, it seemed to be, from a regulatory standpoint, "Who do you catch first?" rather than "How can we prevent these situations from occurring?" If you go in with a prevention-first mindset, you build a much stronger system.

Taxes

What I'd like to see is short-term gains are taxed at a high level, perhaps even higher than ordinary income—by short term, I mean less than a year. And then there would be something for the medium-short term, which could be defined as 1 to 5 years. It won't be popular. But I don't see why short-term investors have such a huge advantage from a capital-gains perspective. I'd like to see a system where long-term investing is rewarded. The economists can debate whether it is 5 or 10 years, but we need an incentive for people to invest for the long run. It would help the savings rate in this county, and get us away from this short-term trading mentality we have. You could make the argument that if someone holds an investment for 20 years, they shouldn't pay long-term capital gains. To me it's one of those curious things.

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