Burning Down the Camp

This story is from Arnold Kling at EconLog. So simple that even a child could understand but so complex that most politicians probably won't.

The Financial White Paper: A Fabulous Tale

Arnold Kling

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