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of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

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Today is March 22nd, 2012, and my guest is Eugene White of Rutgers University, Eugene

Welcome to Econ Talk. Oh, thank you for inviting me. Our topic for today is banking regulation,

and in particular, we're going to draw on your recent paper rethinking the regulation of banking,

choices or incentives. What do you mean by the title of the paper? What do you mean by choices

or incentives? Well, I meant to distinguish between two approaches to how you regulate banks.

Banks are institutions which we really create. We give them certain privileges,

and we retain the right to regulate them. However, the dominant means of regulating them

for most of the past century has been to tell them what they can and cannot do, to regulate

their choices. Say you can invest in this, or you can't invest in that, or you must make this

type of loan. What I'm suggesting here is that there's another approach to doing that, and that is

instead of telling people what the choices they should be making or the bankers what they should

be making, they should be giving the proper incentives for them to do so. That is giving them

the incentives to make the right choices rather than telling them what the choices are.

That seems like a very good idea. I mean, one of the

stranger parts of the current mess we're in is the role that leverage played,

and there's a debate, I think, mainly a confusion, not so much a debate, about

how much leverage was allowed to be used by certain types of banks, and some people have pointed

...