If one wishes to find the true source of the economic debacle of 2008, one need only look to the government policies that cajoled, encouraged and then demanded that banks loan money to people to buy houses they couldn’t afford — and then put the American taxpayers on the hook for the loans that will never be paid back. This proposal is not going to put one American back to work, which is where the Administration should be focused

Rep. Jeb Hensarling (R., Texas): WSJ. Once again, Jeb demonstrates that he has absolutely no idea what is going on as he imagines a world where the real estate bubble was a function of the US government’s diabolical control of banks such as Morgan Stanley, Goldman Sachs, Lehman Brothers, Bear Stearns, Merrill Lynch, Citigroup, and others. In other words, there was never any risk that these banks would be nationalizedThey already were, and that’s why we ran into trouble with the real estate bubble. As Simon Johnson remarked, “push every republican to take a public stand, and you will be amazed at what you hear.”

Douglas Elliot brings some sanity to the discussion…

I am concerned, as a general matter, about arbitrarily limiting the size of the banks, since our modern, complicated, global economy demands that the U.S. have at least a few banks capable of providing a very wide range of services each on a large enough scale to be efficient. However, there certainly may be circumstances in which regulators ought to push a bank or banks to be smaller in general or smaller in certain activities. The question is how to balance the considerations and avoid arbitrary limits or decisions.

Douglas J. Elliott, Fellow, the Brookings Institute, as he correctly observes that “it is somewhat difficult to draw a bright line between ‘proprietary investments’ and traditional liquidity management activities…between investment and trading.”

It should be absolutely clear that banks which are too big to fail must be shrunk, and that using government-guaranteed consumer deposits to trade securities for profit is a terrible idea. It is a relief to see these holes in the regulatory structure get some attention.

The Economist, cutting to the quick