Incentives, Not Tools

Ryan Avent has a long, smart post on financial reform:

[S]everal of the conference's speakers made the point that regulators had about 90% of the tools they needed to prevent a serious crisis before the crisis hit. They just didn't use them. A lack of needed tools is a convenient excuse for everyone who failed to do their job before the crash, which is everyone, and so you see the reform debate focusing on which new rules or institutions or regulators or authorities are needed that weren't previously around. In some cases, the new tools argument makes sense, but most of the time the real problem was that the people in charge were unwilling to do their jobs.

To generate different results moving forward, what's needed isn't new councils or abilities, but new incentives and better oversight. Incentives and oversight could be changed via legislation, but they don't have to be. Cultural shifts, or a press given less to financial cheerleading could make a meaningful difference.

Yglesias is more upbeat. I think the cultural shift is here for a while, but tighter rules are essential.