Credit freeze

The New York Times reported today that many banks and financial institutions are reducing business loans. This sounds justified given the IMF's most recent report that credit risk remains elevated. There is no doubt that the sub-prime mess has spread through the economy. But personal loans should and have been tightened; they contribute little to economic growth unless in the form of overvalued housing prices or discretionary purchases. To tighten access to capital for businesses is a worrying step. This constrains the private sector expansion and innovation that contributes to overall economic growth.

But despite my views on what it may do to growth, for banks that haven't been bailed out this is probably a wise move. They should be allowed to navigate the credit crisis in what they see as a responsible and fit manner for themselves and their shareholders. But banks that were "too large to fail", and rightfully bailed out, should at least be forced to give the government a seat at the table and this is a perfect example. The current crisis and new environment present a ripe opportunity to overhaul the regulatory framework. Cyclical ups and downs will not be relegated to the past but new regulation may mitigate the impacts of future downturns to one sector or aspect of the economy.

Regulation does not have to mean outright control or even lower profits. If government officials (or at least Fed overseers - partisan ideas should not be involved) were given a short term advisory and observatory role, new rules may be drawn up in a compromised manner. This temporary set up would preclude any delusions about a new waves of GSEs and result in a new class of government wonks uniquely suited to draw up and implement new regulation based on inside understanding and access to financial and bank executives.

Economic crises require new regulation and ideas to prevent misatkes from recurring. Ideology can only carry one so far; let's hope pragmatism follows.