Health reform, for all the complexities of its details, was a pretty clear issue; there was almost a theorem-theorem-lemma feel to figuring out what had to be done, leading you to something like the actual reform we got. Yes, there should have been a public option. But the basic structure of the issue was clear.
Financial reform is a much messier debate. It doesn’t break down simply on some left-right axis, although that’s there too. Instead, there are a bunch of competing views of what the problem is all about. In fact, by my count there are six such views. They’re not all mutually exclusive, but it matters which of the six you place at the top of the list.
Now, I have a personal opinion: basically, I believe in view #2, with some allowance for #3 and #4 too. But before I defend my version, let me lay out the list of candidates for explaining the mess we’re in. Later on, I’ll also describe three visions of financial reform, again along with my personal preference.
So: what’s the problem? Here are the views I see out there.
- Size: Our largest financial institutions have just gotten too big
- Shadows: The rise of shadow banking, institutions that fulfill banking functions but evade the regulatory regime, has undermined stability
- Opacity: We’ve come to rely on complex financial instruments that neither regulators nor the private sector
- Predation: Financial firms deliberately misled consumers and investors
- Government intervention: Public policy pushed lenders into making bad loans, especially to the poor
- Monetary mismanagement: The Fed did it by keeping interest rates too low for too long, and/or policymakers panicked in 2008 and spooked the markets
Read on...