(2009-07-23) Kling Crisis Narratives

Arnold Kling sees 2 dimensions of Narrative-s about Credit Crisis 2008. * There is Left and Right; and there is Insider and Outsider. The Left thinks that deregulation did it... The difference between insiders and outsiders concerns whether troubled financial institutions needed to be propped up or shut down. The insider view is that the main problem was a loss of confidence, and government assistance is important to solving that problem. The outsider view is that the banks were too big, too highly leveraged, and took on too many bad mortgage assets... The Left-outsider view is represented by Simon Johnson... the Right-outsider view is represented by yours truly.*

He then offers a critique of the Obama Administration's proposals for regulatory reform, as put forth in an 88-page paper issued by the Treasury, called "A New Foundation: Rebuilding Financial Supervision and Regulation," which I will refer to henceforth as the Report. The Report offers a misguided diagnosis of the crisis, which in turn leads to questionable recommendations for reform.