Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Monday, March 1, 2010

WSJ: Why Financial Reform is Stalled

Came across this excellent article today, by Peter J. Wallison. In case you haven't seen it, click here.

In a nutshell, he criticizes the standard explanation of political gridlock (an hypothesis that does not square well with the fact of resistance on both sides of the aisle in Congress).

Instead, he suggests the following entirely plausible explanation: The current proposals are not grounded in a valid (or persuasive) explanation of what caused the financial crisis. He goes on to give a lucid description of the power of moral hazard.


  1. I've often thought that the whole crisis that began in Sept. '08 with Lehman's failure could have been forestalled had the government not interfered with the fall of Bear in March '08. Let Bear fail and go into bankruptcy and we'll have an orderly work out, without the "too big to fail" specter looming. What's your thought on... my thought?

  2. Prof J: Your thoughts are my thoughts exactly. They should not have done BS. But conditional on having done it, not interfering with Lehman would likely have made things worse. I'm not sure (it would be interesting if we could play out the counterfactual associated with not rescuing Lehman).

  3. I agree about Lehman. Not rescuing Lehman induced a great deal more risk into the economy. I call it "political" risk, and maybe that's not quite correct, but I think it conveys the spirit of the main source of uncertainty.