Jonah, there’s another point to be made regarding markets and the rush to “reform” advocated by Drum and others. Drum links to Jon Chait’s post claiming that “if anybody has ‘learned a lesson,’ it’s the government, which learned that allowing even one firm (Lehman) to fail can have catastrophic consequences.” But as our colleague Peter Wallison has pointed out repeatedly, to the extent that’s the lesson the government learned, it’s the wrong one:
There have been a number of explanations of what happened after Lehman, but the least plausible one–based on the evidence that we have–is that Lehman’s bankruptcy caused the financial meltdown that followed.
Read Wallison’s whole speech to understand the argument in full and revisit the events, including the Bear rescue. The point for this discussion is that progressive advocates of reform seem incapable of seeing the myriad ways in which the government itself played a major role in the crisis of recent years. And until they do, it’s difficult to be enthusiastic about their policy prescriptions. To illustrate: the Dodd bill doesn’t even mention the GSEs in its 1300 pages.
Is it possible a bad reform is worse than none at all? Certainly, particularly if, as is the case today, the reformers have learned the wrong lessons. Of course, it’s not impossible for pols and bureaucrats to learn the right lessons from history and act accordingly. But that’s not what we’re seeing unfold with the current legislation. And it’s a shame because a key lesson of the Rogoff and Reinhart book, cited by Drum, is that there will be another financial crisis in the future. The reform measures currently being considered will likely make the next one worse.