Are We Doomed?

Wow. Ryan Avent and Kevin Drum sure are depressed about the state of financial regulatory reform.

To offer a more optimistic take, consider that it’s not as if economy-destroying financial crises are happening once every nine months as is. These are fairly rare occurrences. And also consider that, as is generally acknowledged, there’s a lot that regulators could have done under the current system to prevent this. For a while now, at least, regulators will be more on guard than they were. So that alone will make crises less likely. On top of that, creating a systemic risk council will help. Clearing derivatives will help. And tougher leverage ratios will also help. And I think these changes compound each other. Given three different measures that each make a crisis half as likely and do them all, you can make a meltdown eight times less likely. On top of that, we’re talking about putting a resolution mechanism in place so that the next time something does go badly awry it can be taken care of in a relatively clean way rather than with a new taxpayer-financed bailout.

That’s pretty good stuff.

It’s true that there’s also a credible argument that the entire role of Wall Street in our society and economy should be rethought. I’m sometimes convinced that’s true, and most times I think higher taxes on the rich to finance more and better public services would suffice. I definitely think it’s a shame that this whole discussion is nowhere to be found in the political process. But there’s actually a reasonably well-defined problem here — how to minimize the odds that political authorities will face a Hobson’s choice between economically catastrophic bankruptcies and morally outrageous bailouts — that the major legislative proposals take a major bite out of.