The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.

The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

My response goes something like this.  We live in an imperfect world with imperfect regulations on financial markets.  Hence, there exist policies that would represent an improvement on the current system, but there are also many (more) ways to mess it up even worse.

It would be much easier if we could close our eyes, make a wish, and eliminate stupidity and dishonesty.  But since that won't happen, let's think about whether the Obama plan would represent an improvement.

Hopefully it would put a stop to the "too big to fail" argument.  Obama seeks to give the government (Fed) the ability to break up large bank holding companies that get into trouble.  But the only part of the white paper where this is directly mentioned (that I can find) is pages 74-76.  To say it is short on details would be charitable.  Granted, this is something where the rules would probably be written on the fly, but then, isn't that what we're doing now?  Is it enough to just say that we'll let the Fed do what it needs to do?  If we did write rules for this, could the end up being too constraining?  This is a really tough problem, and I don't think they've solved it.

On the plus side, the document does spend a few pages suggesting a larger role for the Fed in overseeing the payments, clearing, and settlement systems.  Now that's something that is actually within their proper scope of regulation anyway.  That seems like a winner.  (But also short on details.)

More rules on trade in derivatives is also something that I would support if done right.  I'll need to think more about what is the right way.

But the document also spends a disproportionate amount of pages discussing how to protect consumers from "financial abuse."  In fact, in my perusal of the document tonight, I see the most detail in this section.  Among other things, they would like to mandate that a traditional fixed-rate 30-year mortgage ("plain vanilla" as they put it) be offered alongside any other lawful mortgage products, and that the consumer be given the tools to compare the various products.

Sorry, I don't see this as making much difference.  We already have disclosure requirements that kill quite a few trees for every mortgage closing.  With all of the information shoved in front of the homebuyer, most people just shut up and sign.  Will giving them more information (as opposed to useful knowledge--which cannot just be given) really make a difference?  If you're an unethical mortgage broker, don't you think that there will be a way to game this system to your advantage (offering fixed-rate mortgages at exorbitant interest rates to discourage their use, for example)?

Yet this seems to be where the administration is focusing its efforts.

Fortunately, there was some other insightful comment on regulation today.  Arnold Kling writes in a guest column at the Washington Post:

In my view, the worst regulatory error was allowing bank capital regulations to be evaded. In the late 1980s, after many savings and loans had failed in the United States, international bank regulators developed the Basel capital accord. Although this was flawed in many respects, it did represent a formal requirement for banks to hold capital based on risk. Most assets required 8 percent capital. Some low-risk assets required 4 percent capital, and some government securities required even less.

Soon after the capital accords were rolled out, banks began to come up with ways to "game" the system. For mortgages, the two most important techniques were securitizing mortgages and creating off-balance-sheet vehicles. Securitization allowed banks to get large portions of their mortgage portfolios rated AAA, and these AAA ratings in turn lowered capital requirements, particularly after a revision to the capital requirements that was formalized on Jan. 1, 2002. The off-balance-sheet entities were an even bigger scam, because generally-accepted accounting principles (which the regulators copied) allowed the banks not to count the mortgage securities in these entities as assets at all.

All of this was done right under the nose of the regulators. An article in 2000 in the Journal of Banking and Finance,called "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," was written by a Federal Reserve staffer. Although such scholarly articles always carry disclaimers that the contents do not represent the opinions of the Fed, it clearly showed an awareness of how banks were using techniques to evade capital requirements. The author rationalizes this in part by suggesting that without the ability to evade capital requirements, banks would have been less competitive in the market to finance mortgage loans or other low-risk assets.

I think Kling is on the right track.  If financial market regulation is like firefighting, then to prevent this sort of gaming of the system would be like starving the fire of fuel.  A different tactic than pouring water on the fire, but still effective--sometimes more so.

At Marginal Revolution, Tyler Cowen writes:

The broader point is this.  Better regulation comes through many years of experience and gradual process improvements, built upon some reasonable methods for imposing regulatory accountability.  That's how the FDIC got to be good at much of what it does.  Better regulation does not come from sitting down, waving a wand, and hoping that a new name or box will address the problem you are concerned about.  Keep that in mind next time you hear that "now is the unique moment," etc.

Well put.  Doubling or tripling the amount of paper shoved in front of a home buyer at closing won't do it either.  There should be changes.  But there really isn't any need to rush something through by the end of the year. We're not in danger of a repeat of the circumstances that laid the groundwork for the crisis any time soon.  So take some time and do it right.  There might be a few good ideas in the Obama plan, but there is also a lot more alphabet soup without a lot of details about how it will all work.

Felix Salmon calls it a bust as well.

On May 22, 2009, Citizens National Bank , Macomb, Illinois was closed by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.  No advance notice is given to the public when a financial institution is closed.

There are many clever moments in the thoroughly satisfying new "Star Trek" movie, but the one that has economists chattering is more than just smart: It strikes right to the core of what the Star Trek future is all about.

The scene comes early, when a pre-pubescent Spock is undergoing the formidable educational process inflicted on all Vulcan children. We see and hear him say the words "nonrival" and "nonexcludable" (and we can imagine his computer tutor nodding encouragingly).

And then we move on, without explanation. To my children, and, I imagine, to most Trekkies, the moment was just one more jargonistic outburst in a franchise that has always delighted in excessive indulgence in meaningless techno-gibberish. But the economists in the audience all started high-fiving each other: Whoa, who could have expected a shout-out to economist Paul Romer's breakthrough paper, "Endogenous Technological Change," in a "Star Trek" movie? Awesome!

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

A surprisingly light-hearted take on the U.S. economy from the Federal Reserve's policy statement sent government bond prices tumbling Wednesday, and yields vaulting to their highest levels for this year.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 6.1 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

There is an economic downside to trying to keep people in their homes, even if underwater. Mike Feroli over at JPMorgan points out the Osward Hypothesis: "Higher homeownership rates increase the natural unemployment rate because it reduces geographical mobility and the ability to move someplace else to find a job."

Justin Wolfers, The Wharton School: Find a cash-strapped soup kitchen. If they are looking at having to make cutbacks, then your $8 donation really will yield $8 worth of extra soup purchases. A good Keynesian will point out that this $8 in extra spending will enter the circular flow, creating the much-needed economic stimulus. (By contrast, university giving may simply prop up a sagging endowment.) But more importantly, the $8 you spend helping the hungry really can have a big bang-for-the-buck at a time when food spending is plummeting and unemployment rising.

Doug Cliggott, Dover Investment Management: You should invest it, not consume with it. Preferably a venture capital investment that will have a significant multiplier effect. This is why tax cuts are the worst type of stimulus. They are usually consumed or invested in a secondary market with little or no multiplier.

Paul Kasriel, Northern Trust: I would use the extra cash to start a hedge fund, which would purchase newly-issued asset-backed securities. I would finance my position through the Fed's TALF program.

Ricardo Reis, Columbia University: You should use the money in the way that is best for you and your family, whether that is saving or spending, buying this or paying that. Doing what is in your best interest usually leads to doing what is best for the economy. (And when it is not, the economic policymakers should have figured that out when deciding whether to, and how to, give you the $8, so that by pursuing your best interest you end up doing what is best for all.)

Alan Blinder, Princeton University: While I might have my own personal favorites, each citizen should spend the money on what he or she sees fit. The idea is to get more spending, more jobs, higher incomes, etc. in the nation's economy.

Martin Feldstein, Harvard University: I don't think individuals make spending decisions based on attempts at good citizenship. If they think this $8 is a permanent increase, they will add it to their overall budget. More likely, they will recognize that this is temporary and will use it to pay down debt or add to their liquid assets

Tyler Cowen, George Mason University: In my view, fixing the banking sector is more important than getting the stimulus right. So if you can afford to lose the money, go to a large bank (more likely to be insolvent), find their most overpriced service, and buy as much of it as you can. That way you are doing your part to recapitalize our banking system.

If you're stuck for ideas, just keep on using ATM machines, owned by other banks, so you can pay large fees to take out small sums of money from your checking account. When you need to, take all of your withdrawals and deposit them back in the account once again and start all over with the process.