It occurs to me that one way to think of people’s views on financial regulatory reform is to treat people as using one or more of the following three metaphors:

1. Machismo

Those who are driven by this metaphor think of regulation/de-regulation as a male dominance game between the government and the private sector. Those who think in terms of this metaphor feel comfortable when government is on top. In their view, a breakdown like the current financial crisis comes from government wimping out, caving in to free-market ideology. It’s time to show the markets who’s boss.

In the male-dominance view, the specifics of regulation are not so important. What we need is for regulators to be tough. Think of Eliot Spitzer in his glory days (“I’m a bleeping steamroller.”), bringing the corporate titans to heel.

My view is that when politicians succeed in becoming the top dogs in this manner, you get a situation like Communist China or Montgomery County, Maryland. There, it is quite possible to make a fortune on a business, but it is essential to have the right political connections and to align your business with the agenda of the Party that is in charge.

I fear that’s where we’re headed in the U.S. Think of Freddie Mac and Fannie Mae, able to make a profit in the mortgage business, but only with the right political connections and only if they devoted the required share of lending to so-called affordable housing. Or think of the auto makers, whose political connections will generate government support, and who will probably be held hostage by the environmental movement.

2. Architecture

This metaphor is the belief is that wise technocrats need to make sure that the wild, rambunctious private sector has a safe place to play. By designing the right sorts of circuit breakers and thermostats, the technocrats can ensure that nothing catches fire or causes injury.

The architects are keen on transparency, international co-operation, and unified command. Achieving an optimal social outcome is a matter of getting the top-down design right.

My problem with this metaphor is that I do not believe that the technocrats are any wiser than the markets that they are trying to regulate. In particular, they tend to see only the intended consequences of regulations, not unintended consequences. Moreover, the architecture metaphor misses the reality that in a dynamic world, trial-and-error makes more progress than static design.

3. Housecleaning

This is the metaphor that seems to be driving my thinking. I see a lot of institutions and practices that I want to toss into the garbage:

–mortgage loans with low down payments
–amateur housing speculators owning multiple homes
–people occupying homes they cannot afford
–mortgage securitization, based on “originate to sell” rather than old-fashioned originate to keep
–credit default swaps

My point is not that regulators should ban these practices. But we should cull out policies, including capital regulations, that either deliberately or inadvertently promoted them. Insteaad of trying to prop up Freddie, Fannie, and the insolvent banks, I would try to foster a transition toward safer lending practices undertaken by healthy institutions. I think that if we would just do the housecleaning, the economy would right itself. We wouldn’t need all these bailouts and stimulus packages and other nonsense.