Arthur Levitt ’52 in the Financial Times:

The Massachusetts special Senate election has not only generated fresh thinking about healthcare reform – it has also given new urgency to financial market regulatory reform

… [Lots of wonkery.]

Though these steps are critical to successful reform, none of it would happen without the wake-up call delivered in Massachusetts. Leaders in both parties now know that voters are frustrated with inaction. Ultimately, what matters most are not issues like banker profits and bonuses, but investor confidence in US markets. That confidence will come from greater transparency. Every regulatory reform must contribute to that goal.

Read the whole thing. Levitt is right to be highly skeptical of some of Obama’s ideas but wrong to think that his own specific regulations are likely to be any more successful. Smart people (like him!) have been regulating financial institutions for 50 years. What has all that work brought us? Disaster.

The only solution is to punish the dumb capital that lent money to suspect institutions like Lehman, Bear, Fannie, Freddie, Bank of America and so on. Allowing Lehman to go bankrupt did more to help the process of reform than 1,000 Levitt regulations because it inspired (at least some!) diligence on the part of the folks who control the capital. They were burned. They will be more careful next time.

But, in my view, they were not burned enough to really learn. We need to let the other bankrupt institutions go bankrupt. That will do more for the cause of financial market sanity than anything else.

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