Responding to Obama on Financial Reform

More

President Obama offers powerful rhetoric but weak proposals.  The financial Humpty-Dumpty of big inter-linked banks, securitized mortgages, and self-defeating housing and bank capital regulation policies has had a big fall.  The Administration's response amounts to putting this Humpty-Dumpty back together, taping on some new regulations, and sticking it back on the wall.  That is not the answer.


Instead, we need new directions.  We need housing policies that don't equate affordable housing with subsidized, lenient mortgage credit.  We need to disconnect the mortgage-backed securities market from the feeding tube of government support.  We need to put an end to too-big-to-fail, too-connected-to-fail, and to too-regulated-to-fail.  Too-anything-to-fail is self-defeating, because it only encourages excessive risk-taking.

Instead of too-regulated to fail, we need to make failure a credible and viable option for financial institutions.  We need business continuity that ensures that everyday financial transactions will continue when a bank fails, no matter what the size.  We should have procedures and emergency response teams in place, so that we can swoop in the day that an institution fails and ensure that the next morning the ATMs work, checks can clear, and transactions on credit cards and debit cards can be processed.  But we will not see prudent financial behavior unless we can convince bankers that we have a viable and credible option of allowing them to fail.

I will have more to say on Tuesday here.

Jump to comments
Presented by

Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
Get Today's Top Stories in Your Inbox (preview)

When Will Robots Take Over the World?

"In a sense, we're already becoming cyborgs."


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Video

The Origins of Bungee Jumping

"We had this old potato sack and I filled it up with rocks and dropped it over the side. It just hit the water, split, dropping all the stones. And that was our test."

Video

Is Trading Stocks for Suckers?

If you think you’re smarter than the stock market, you’re probably either cheating or wrong

Video

I Spent Half My Life Making a Video Game

How a childhood hobby became a labor of love

Writers

Up
Down

More in Business

Just In