In an interview with Aaron Task and Henry Blodget on Tech Ticker today, John Mauldin, the influential investor behind the online newsletter "Thoughts from the Frontline," warned that in the absence of comprehensive financial reforms to rein in derivatives and reduce leverage, Americans will soon face another crisis. "The impetus to get it done should be now," he said.
Drawing a parallel between credit-default swaps and futures contracts, Mauldin argued forcefully that CDS should be transferred onto an exchange, a move he claimed would help curb the "monstrous risk" they pose to the system without hindering innovation. "We haven't stopped innovation because we have S&P futures, or commodity futures, or corn futures on an exchange," he said.
Since the financial system is so interdependent that a single bank can "[put] the whole system at risk," Mauldin recommended the enactment of "some kind of mechanism that the bigger you get as a bank, the less leverage you're allowed to use." Ultimately,"it's not a bank that's too big to fail. It's a system that's too big to fail."
But trying to discuss specific regulations with the public can be a "frustrating" exercise, Mauldin admitted. "People get bored and their eyes glaze over when you talk financial reform."
And yet without its implementation, "we'll have to hold our nose and bail out banks again -- if we have the stomach for that. And if we don't," he counseled, the country could endure an even worse downturn: "then we'll have a real crisis."
Watch the full interview below: