Regulatory Reform

While it's hard to know for sure what the right regulatory reforms are, a few principles should govern their choice:

1. No regulation should fix a very specific recent market failure since regulations have unintended consequences (biofuels) and the market takes care of such matters anyway. For example, lenders unfortunately won't be lending to people of modest income who can't repay for some time to come so regulatory assistance in this regard isn't necessary.

2. Regulations should carry over to other areas those regimes that operated well in parts of the financial sector. For example, whatever regime governed hedge funds should be adopted for all financial institutions and whatever regime governed banks should be assiduously avoided.

3. Regulators who behave disreputably should not accrue responsibility. For example, the Fed provided a 28 day funding facility to Bear Stearns on March 14, with the clear intent to create market reliance on that. It was withdrawn the same day. This as yet unexplained act of astonishing credibility destruction and lack of wisdom should discredit whoever's responsible for it from having any greater responsibility for the financial system

4. Clearinghouses are good.