Success Breeds Failure

[Warpy]

The bad news is that as markets stabilize, chances for fundamental financial reform may be slipping away. As a result, the next crisis will probably be worse than this one.

After the financial crisis that ushered in the Great Depression, New Deal reformers regulated the banking system, with the goal of protecting the economy from future crises. The new system worked well for half a century.

Eventually, however, Wall Street did an end run around regulation, using complex financial arrangements to put most of the business of banking outside the regulators’ reach. Washington could have revised the rules to cover this new “shadow banking system” — but that would have run counter to the market-worshiping ideology of the times.

And now that the financial clouds have lifted a bit, the pushback against sensible regulation is in full swing. Even the Fed’s very modest proposal to curb abusive mortgage lending with new standards is under fire, and there are worrying signs that the Fed may back down.

Much, much more at http://www.nytimes.com/2008/05/05/opinion/05krugman.html