In his latest column Paul Krugman lauds the banking reforms being enacted by Congress going on to acknowledge that they won’t do much about the problems that actually happened:
Reform, in other words, probably can’t prevent either bad loans or bubbles.
However, hope springs eternal:
But it can do a great deal to ensure that bubbles don’t collapse the financial system when they burst.
Additional regulations will prevent future occurrences:
Transparency is part of the answer. Before the crisis, hardly anyone realized just how much risk the banks were taking on. More disclosure, especially with regard to complex financial derivatives, would clearly help.
Beyond that, an important aspect of reform should be new rules limiting bank leverage.
For all I know that may be true but I doubt it for one simple, discomfiting reason: the example of AIG. In AIG’s case, its regulatory agency, the OTS, had the mission and the power to prevent the actions that lead to the company’s crisis. They just didn’t do it.
Regulators are human, too, and subject to the same problems of moral hazard that bankers are. If, indeed, the crisis in the financial system was caused by too much concentration of risk, as Dr. Krugman suggests, then the only solution would appear to be to prevent banks from getting so big that they have the ability to concentrate that much risk. If they’re too big to be allowed to fail, aren’t they too large to be allowed to exist?
As a regular reader of Johnson and Kwak, I am all for downsizing. I would prefer that we downsize, then eliminate all but a very few blunt regulations. Then let em fail when they fail. (The other way to help stop AIG’s from happening is to not elect Bushies.)
Steve