David Brooks nails a big piece of financial reform

http://www.nytimes.com/2010/04/27/opinion/27brooks.html The second big event in Washington this week is the jostling over a financial reform bill. One might have thought that one of the lessons of this episode was that establishments are prone to groupthink, and that it would be smart to decentralize authority in order to head off future bubbles. Both N. Gregory Mankiw of Harvard and Sebastian... [more]

http://www.nytimes.com/2010/04/27/opinion/27brooks.html The second big event in Washington this week is the jostling over a financial reform bill. One might have thought that one of the lessons of this episode was that establishments are prone to groupthink, and that it would be smart to decentralize authority in order to head off future bubbles. Both N. Gregory Mankiw of Harvard and Sebastian Mallaby of the Council on Foreign Relations have been promoting a way to do this: Force the big financial institutions to issue bonds that would be converted into equity when a regulator deems them to have insufficient capital. Thousands of traders would buy and sell these bonds as a way to measure and reinforce the stability of the firms. But, alas, we are living in the great age of centralization. Some Democrats regard federal commissions with the same sort of awe and wonder that I feel while watching LeBron James and Alex Ovechkin. The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one. [less]