Goldman isn't the problem

It's all very convenient that the Securities and Exchange Commission has decided to indict Goldman Sachs, the uber-investment firm, right in the middle of the Senate's debate on the Dodd financial reform bill. Let's get those Wall Street rascals and make the financial system safe!

Like The Wall Street Journal edit page I find myself underwhelmed by the SEC's case. The Journal calls it less of a smoking gun and more like a water pistol.

Now, I have no particular fondness for Goldman Sachs. They mainly give money to Democrats, so I wonder just how badly Goldman will be hurt in the financial reform effort.

And I have no particular fondness for the SEC. Where were they when in mattered, in 2005 and 2006 when a bit of savvy regulation might have softened the crash?

But by all means select a scapegoat and slit its throat on the nation's altar.

Senator Dodd, principal author of the finance reform bill, is one of the hares that helped create the whole Fannie Freddie mess. Where was he in the early 200s when the storm signals were posted? Now he wants to hunt with the hounds.

My problem is that we need less government regulation, not more. We need laws to force more transparency, and especially make clear what risks a corporation is exposed to if things go south. We need laws, not regulation.

And the fact is that a lot of the problem would go away if financial corporations had to post more equity and carry less debt. Because it's equity that guarantees the financial system when things go south. The government righted the financial system in the fall of 2008 by buying equity, through preferred shares, in the banks. On the other hand, there's no reason why a futures market in debt securities couldn't operate successfully. But it needs sensible design so that it can inspire confidence--without the bumbling intervention of government regulators.

No, the big financial problem remains. It is the government's reckless credit policy, from its incompetent central bank to its credit subsidy facilities in mortgages, exports, student loans and who knows what else. Not to mention the ordinary on-budget federal deficit.

Fix that mess and you'll go a long way to fixing the nation.