he most sensible legislative response to the financial collapse of September 2008 would have been to do nothing until the causes of the collapse were fully understood.

There is no urgency about legislating financial regulatory reform. The existing regulatory agencies have virtually total authority over the financial industry. And because they were asleep at the switch when disaster struck, they are now hyper- alert to prevent a repetition of it. Indeed, bank examiners have become so fearful of condoning risky practices that they are making it difficult for banks to lend to small businesses and consumers and thus are retarding the economic recovery.

The principal factors in the recent economic collapse were:

No. 1. Incompetent monetary policy, which under former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke produced the housing bubble that burst, bringing down the financial industry, which was heavily invested in the mortgage market.

No. 2. The inattention of the Fed and the Securities and Exchange Commission, which didn’t understand the changing nature of the banking industry, particularly the rise of so-called nonbank banks dependent on short-term, noninsured capital.

No. 3. The over-indebtedness of the American people and government, which has hampered the restoration of credit.

No. 4. The failure of the Treasury Department under former Secretary Henry Paulson and the Fed under Bernanke to rescue Lehman Brothers Holdings Inc. They didn’t realize that Lehman’s bankruptcy would trigger a run on the banking industry, causing a global credit freeze.

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