The alternate universes inhabited by insiders and outsiders are evident in two links from Mark Thoma.

First, Bill Dudley gives us the insider view.

Liquidity risk will never be eliminated, nor should it. The preferences of borrowers to borrow long and of lenders to lend short means that the maturity transformation process generates real benefits. However, we can do better to make our system less prone to the types of liquidity runs that we have experienced. If we remain committed to implementing the reforms that are already underway, I am confident that we can dramatically reduce the risks of the type of liquidity crises that we experienced all too recently.

Not one word about a housing bubble. Not one word about loan defaults. He lives in a universe where lenders did everything right, except that they did not maintain enough liquidity to survive a loss of confidence.

The outsider view comes from Steve Randy Waldman. He is rightly skeptical about the ability of regulators to let large banks fail, even with “resolution authority.”

My sense is that during a gut-wrenching financial crisis, hypothetical funeral plans will provide little comfort to terrified regulators, prepaid slush funds will prove to be laughably inadequate, and commitments to make firms pay for the mess ex post will be waived in order to shore up struggling bank balance sheets. These proposals are about providing the political cover necessary to get legislation passed, but they will prove to be utterly without substance when the next crisis occurs.

Read the whole thing.