More Parachutes and Fire Extinguishers would Not Help!

I'm a sucker for a good analogy...

Imagine that the arguments triggered by the Hindenburg disaster were about the fire extinguishers and parachutes that airships should carry, rather than about the design flaws that might cause them to ignite. Unfortunately, today’s debates about banking reform have just this character.

Reversing the robotic gigantism of banking ought to be the top priority for reform. Bankers were once supposed to know every borrower, and to make case-by-case lending decisions. Now, however, banks use models conjured up by faraway financial wizards to mass-produce credit and a range of derivative products. Mass-production favors the growth of mega-banks, so, unlike the misjudgments of lending officers, these behemoths’ defective models have had disastrous consequences.

Instead of tackling the hard problem of design, we dither about the edges and complain that the reforms aren't doing anything.  Of course they're not! We're not addressing root causes, just secondary effects of a root cause.

We can no longer afford to rely on old-fashioned examination for mega-banks loaded with mass-produced risks. And because stockholders or raiders can’t force streamlining, governments must require these banks to shed activities that no one can manage or regulate and stick to hands-on case-by-case lending. With huge profits and bonuses at stake, mega-banks won’t readily abandon their model-based businesses; but, unless that happens, placing most of our bets on top-down rules would be reckless folly.