Responding to Obama on Financial Reform

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.

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.

How a Psychedelic Masterpiece Is Made

A short documentary about Bruce Riley, an artist who paints abstract wonders with poured resin

Join the Discussion

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

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

How a Psychedelic Masterpiece Is Made

A short documentary about Bruce Riley, an artist who paints abstract wonders with poured resin

Videos

Why Is Google Making Skin?

Hidden away on Google’s campus, doctors are changing the way people think about health.

Video

How to Build a Tornado

A Canadian inventor believes his tornado machine could solve the world's energy crisis.

Video

A New York City Minute, Frozen in Time

This short film takes you on a whirling tour of the Big Apple

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we save the night sky?

More in Business

Just In