Heading off the next financial crisis

Long article (still reading it...), but good overview of what needs to be done... I especially like "Obama's fondness for policies based on empirical research" - for some reason I don't think that's a fondness Bush shared...

"A public good is something that the free market tends not to provide on its own, to the detriment of society. Pollution laws and police departments are classic examples. In the case of finance — and of the crisis of the past two years — this missing good has been strong regulation. A weak system of regulation allowed Wall Street firms to take on enormous debt. Those debts let the firms make more and riskier investments than they otherwise could have, lifting their profits. But when the value of the investments began falling, the firms had little margin for error. They were like home buyers who made a tiny down payment and soon found themselves underwater."

...

"More important, though, than where the oversight function is housed is how it approaches regulation. In this regard, the administration is on to something. The agency may be the most politically assertive part of Obama’s plan, but it also reflects his — and his advisers’ — fondness for policies based on empirical research. The word they like to use is “pragmatic.” As White House and Treasury officials imagine the new agency, it would be an outgrowth of behavioral economics, a discipline that combines psychology and economics to study how people really behave, rather than how they say they will or how academic models predict they will behave. The agency would even be able to run experiments, in which social scientists could study how consumers respond to different financial offers."

http://www.nytimes.com/2010/03/28/magazine/28Reform-t.html?hp=&pagewante...