Krugman Worries about Financial Reform

When Krugman worries, I break out in a cold sweat. He knows his stuff. If he is worried, we should be scared silly.

Here's a bit from a posting by Paul Krugman on his NY Times blog:

...long ago, I read about the difference between the military methods of the Romans and those of the Hellenistic regimes set up after the conquests of Alexander the Great. Hellenistic armies, it was explained, were collections of specialists: heavy infantry with 16-foot pikes, archers, cavalry, and so on. Roman armies, by contrast, consisted of generalists: guys with shields, short swords, and javelins.

Used optimally, the Hellenistic armies had the advantage: longer reach if their heavy infantry confronted guys with shorter spears, longer range if their archers confronted guys with javelins, and so on. But making sure that everything went right required a first-rate commander; you could mess up badly if your phalanx found itself on uneven ground, etc..

Roman armies, by contrast, were relatively robust to mediocre leadership, since the soldiers could function relatively well in many circumstances. And in the end, since mediocre leaders are the norm, the Roman way prevailed.

So what does this have to do with financial reform? The pre-1980 system was, I’d argue, pretty robust. Bank regulators didn’t have to be all that smart, because the rules were simple — and besides, the large franchise value of banks, the fact that they faced limited competition and were almost guaranteed to be profitable, made bank executives unwilling to take big risks of killing the goose that laid golden eggs.

By contrast, the regulatory proposals now on the table are fairly Greek — they rely on regulators identifying systemic risk and the actions to combat it.

I've been waiting for financial reform, but now it looks like what is proposed is more of a pretense than a reality. That means sooner, much sooner, the US -- and by consequence the whole world -- will be put through the wringer again. The wealthy will be shorn like sheep by a falling stock market and everybody else will be looking at 10% or higher unemployment for a couple of years. You would think the lawmakers would "gird their loins" an do the right thing. But I guess the money passing under the table must be immense. You know, everything is for sale in Washington.