Thursday, June 18, 2009

The President’s Plan

The Lehmann Letter ®

President Obama’s plan to reorganize and modernize our nation’s financial-regulatory system will institute a big improvement over the status quo.

Think of these two issues:

1. With proper regulation, would as many homeowners have faced foreclosure? Would they have been cajoled, enticed and just plain encouraged to take on a mortgage-burden they could not afford? Suppose new regulations institutionalize reasonable down payments and other strictures that prevent irresponsible lending and borrowing, can we reduce the likelihood of another disaster?

2. With proper regulation, would financial intermediaries have been able to securitize those mortgages and pedal them around the globe? Would those toxic assets have found a market? Suppose new regulations impose reasonable restraints upon securitization?

It could have been different. The new regulations should prevent a repeat performance.

Some critics are saying the proposed changes will stifle innovation. Perhaps. Just remember that sub-prime mortgages and mortgage-securitization were innovations. Not all innovations are of equal social value.

Other critics say the new regulations will slow financial markets’ functioning. Perhaps. That would be a cost. But the benefits will likely be worth it.

© 2009 Michael B. Lehmann

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