Dean Baker\’s solution to Wall Street woes

Rather than just make below market loans, with few or no conditions, we could have made loans conditional on changing the way the banks did business. This would mean prohibiting them from dealing in complex derivative instruments, limiting leverage and seriously cutting executive compensation.

Hmm.

The reason we were worried about the banks falling over is because it would have meant that companies and households could not borrow. We know that this leads to lots of such falling over and the economy shrinks.

Limiting leverage will lead to fewer households and companies being able to borrow therefore more of them will fall over and the economy will shrink.

Quite how insisting upon the economy shrinking is the perfect method to avoid the economy shrinking I\’m not quite sure. But then I don\’t work for a left wing think tank so perhaps there\’s some subtlety that I\’ve missed.

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