We don't need more financial regulation

as much as we need less government meddling:

The current panic is the ugly aftermath of the credit mania that took flight in the middle years of this decade. As students of economic historian Charles Kindleberger know ("Panics, Manias, and Crashes"), financial manias throughout history have shared one trait: the excessive expansion of credit. This bubble was no different.

The Federal Reserve kept interest rates too low for too long, creating a subsidy for debt and a global commodity price spike. The excess liquidity and capital flows this spurred became the fuel for the wizards on Wall Street and in mortgage-finance who created new financial instruments that in turn fueled the housing bubble.

I recently identified the co-authors of the mortgage credit crisis here, including a President, Fed Chairman, and Secretary of Housing and Urban Development.

The proposed solution is intriguing, especially a similar response worked last time there was a panic of these levels:

Which leads us to suggest another Resolution Trust Corp. as one more tool to calm financial markets. The first RTC helped to buy, stabilize and liquidate troubled assets amid the savings and loan mess of the late 1980s. Then it blessedly went out of business. Former Fed Chairman Paul Volcker endorsed an RTC II yesterday in a speech in Naples, Florida, and we suspect the idea will gain more traction. He said he "reluctantly" embraced the idea for "dealing with the market breakdown, breaking the logjam of mortgages and other assets of uncertain value [and] restoring a sense of reasonable valuation and market confidence."

... a new RTC would provide a buyer for securities for which there is no market, set a floor under the market, hold the securities until markets stabilize, and liquidate them in an orderly fashion, perhaps at a profit. Failed institutions and managers would not be bailed out. There's always a risk that the politicians will meddle, which is one reason for the Bush Administration to do this now so it can insist on enough political insulation.

Thirteen months into this crisis, the best choices are the same as they were last August: energetic emergency plumbing to protect the financial system, steady monetary policy to defend the dollar, and a tax cut to spur growth

I like this idea because distressed assets can actually be marked-to-market again, which will increase loans.

UPDATE: Steven Davidoff raised similar thoughts on the history of the Drexel bankruptcy during the Bear Stearns fade-to-black.