The Inevitable Crisis

David Brooks says that folks who think better regulation could have prevented this crisis or that better regulation will prevent the next crisis are fooling themselves — big government’s just not up to the task:

To sum it all up, this supposed new era of federal activism is going to confront some old problems: the lack of information available to government planners, the inability to keep up with or control complex economic systems, the fact that political considerations invariably distort the best laid plans.

This doesn’t mean there’s nothing to be done. Martin Wolf suggests countercyclical capital requirements. Everybody seems to be for some updated version of the Resolution Trust Corporation, though disposing of complex debt securities has got to be more difficult than disposing of commercial real estate.

I’m not sure this is right (not sure political pundits should be making confident assertions about financial regulations) but I do think it’s plausible. But if it’s right — or, rather, if we decide to make policy based on the assumption that it’s right — then it has some much broader implications. By targeting his ire at unnamed regulation enthusiasts, Brooks manages to somewhat obscure the fact that his conclusion — that we should passively accept the inevitability of crises and the need for post hoc taxpayer bailouts — is totally unacceptable. His logic, however, is a good deal better. But where this leads is to the point that while we may not have any idea how to organize a regulatory scheme to keep well-credentialed con artists from making hundreds of millions of dollars by screwing things up so badly that taxpayers need to spend tens of billions cleaning up the mess, we most certainly do know how to put higher taxes on extremely high-income people and spend the money on social services for the broad mass of people.


After all, right now the floor for the top income tax bracket is actually pretty low. We could add many new brackets so that a guy earning $300,000 a year isn’t paying at basically the same rate as someone earning $30 million. The rates near the top could get really punitive and confiscatory. Maybe if that was the case the best and the brightest wouldn’t have strong incentives to go into investment banking, but . . . so what?