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This is because "moral hazard," -- the ability to take risks knowing that someone will bail you out -- was increased, and firms didn't make the hard choices about restructuring. As Manhattan Institute scholar Nicole Gelinas, a chartered financial analyst, wrote in the Wall Street Journal, "the Fed, by being so quick to jettison the bankruptcy process, cut off a valuable source of new information to financial markets and blurred the critical distinction between sophisticated and unsophisticated investors." And in a recent paper presented at the prestigious Jackson Hole Symposium held by the Federal Reserve Bank of Kansas City, professors from the University of Pennsylvania's Wharton School and the University of Frankfurt conclude that, "Given the characteristics of the markets where Bear Stearns operated, it is quite possible that...no contagion would have occurred."

Yet Paulson has staunchly refused to provide financial firms any regulatory relief from one problem that experts, including the authors of the paper mentioned above, say is contributing strongly to the contagion: mark-to-market accounting. As I wrote last weekend in the Wall Street Journal, these recently imposed rules force even healthy banks to face "regulatory insolvency" because they have to value their loans based on any sick bank's fire sale, even if they have no plans to sell the loans and the loans are still performing. In fact, Paulson's proposed new mega-bailout may exacerbate this problem.

Yet Paulson, in a stunning statement at the New York Public Library in July, said basically that if the rules are good enough for Goldman Sachs, they're good enough for every community bank. Paulson said, "I think it's hard to run a financial institution if you don't have the discipline which requires you to mark securities to market."

If John McCain is looking for someone else on the Bush economic team to fire, the answer is right in front of him.

topics:
Taxes, Trade, John McCain, Hank Paulson, Bill Clinton, Business, Socialism, Energy