Arnold Kling  

The Financial White Paper: A Fabulous Tale

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Defending what Paul Krugman Wr... My Favorite Convert...

Once upon a time, there was a summer camp. To entertain the kids, the counselors handed out matches1, lighter fluid2, and newspapers3. The camp burned down.

Afterwards, a white paper was written, proposing more supervision by counselors. It called for a systemic counselor to watch out for camp-wide fire hazards, and it called for procedures to put out fires that are "too big to let burn."

The white paper was written under the direction of two counselors, Larry and Tim, with input from another counselor, Ben.

The end.

1housing policy that encourages speculative purchases and subsidizes mortgage indebtedness
2tax policy that encourages banks and other firms to maximize debt relative to equity
3bank capital regulations that reward securitization and the creation of off-balance sheet entities


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TRACKBACKS (2 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/1984
The author at Roth & Company, P.C. in a related article titled Larry and Tim's plan to regulate summer camp writes:
    Arnold Kling brilliantly summarizes the proposed new financial regulatory proposals. He begins: Once upon a time, there was a summer... [Tracked on June 18, 2009 10:47 AM]
The author at The Freedom Thinker in a related article titled The Story of Camp Counselors Larry, Tim and Ben writes:
    I’d summarized this story previously myself, however, not with the brevity and wit of Mr. Kling. The Financial White Paper: A Fabulous Tale Once upon a time, there was a summer camp. To entertain the kids, the counselors handed out matches1, lig... [Tracked on June 18, 2009 4:42 PM]
COMMENTS (10 to date)
shayne writes:

A truly remarkable document, this.
It is based upon and propagates the myth that all (global) monetary flows can be made completely riskless - of course, given a few trivial pre-conditions:
1.) A super-adequate supply of new regulations (legislative branch),
2.) A super-adequate supply of new regulators (Treasury - executive branch),
3.) A new non-government entity to assume responsibility for any future failures (the Federal Reserve),
4.) All of the above designed to protect any of the largest financial firms from ever having to be exposed to the judicial branch (bankruptcy) - "too big to fail" - and thereby backed by full faith and credit of the U.S. taxpayer,
5.) A complete revision of the recent history of actual significant contributing factors to the current financial situation.

I wonder if there are any homes left in Jim Rogers' neighborhood - in Singapore.

fundamentalist writes:

Very clever! You're showing real signs of literary talent there.

l4k writes:

Nicely done. Short but to the point. And dead on.

guthrie writes:

Brevity is the soul of wit – Shakespeare

Bravo!

Brian writes:

The sad thing is that 53% of Americans probably didn't get it.

Yancey Ward writes:

Poor Arnold, now the leftosphere will be claiming he wants children to die in horrid, fiery accidents.

Alex R writes:

Oh, so that's what happened? 'Cause I heard kind of a different story.

Once upon a time, there was summer camp. To entertain the kids, a counselor named Alan handed out matches (loose monetary policy), lighter fluid (loose monetary policy), and newspaper (loose monetary policy). The camp started burning down.

After staring in awe at the fire for a while (come on, shiny), the kids realized they liked their camp and started trying to put the fire out. But the camp counselors realized that if the kids could put the fire out on their own, what need would there be for counselors? So Tim and Larry started making the kids do push-ups and go to bed early every time they tried putting a little fire out, while sneaky ol' Ben started lighting even MORE fires (too big to let go out?). The parents got scared and said the camp needed even MORE counselors to keep it in line, and the next year the same thing happened. That's just what I heard though...

Nice parable. Apparently, the story can be told many ways depending on your point of view.

The federal government encouraged home ownership with income tax credit against interest paid. That made ownership cheaper than renting. As interest was paid off and equity was built up, the homeowners could sell and buy again. Ideally, in the post-War era, a family could own at least two homes (maybe four) and then take out a "reverse mortgage."

One of the many unintended consequences of this government policy is that it fixed workers in place, and ultimately taxed the mobility to follow labor markets.

Stephen writes:

I've heard about 1 and 3, but not much about 2. Do you have any links or anything about it?

Bill Drissel writes:

Engineer asks question, "Isn't this the same as saying regulation CAUSED the meltdown?"

Regards,
Bill Drissel
Grand Prairie, TX

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