Alice Rivlin Scares Me: Good Intentions Ought Not to Excuse Folly

In an editorial in todays NYT's Alice Rivlin showed why she should never have been a government official, much less the former vice chairman of the Federal Reserve and the Clinton's director of the Office of Management and Budget.  Consider her argument:  the government's (ie. the President's) job is to "protect" the country and "indeed the world" from a financial market meltdown.  Translated -- this means the President's job is to run the economy and make sure there are no economic downturns.  Rebuttal (that a high school student in economics should be able to make):  1) The President's job is not to run the economy.  If given the job he/she would fail miserably.  2)   All free market economies have cycles that include periodic downturns: it is as natural as birth and death; as spring and winter; as a liberal who wants to increase government regulation whenever an excuse is handy.   The government cannot stop he economic cycles and but it can make them much worse (witness the 30s).  With every economic downturn we get cries for the government to "do something" and if we listen to the Rivlins and the government "does indeed do something" we will have a ratchet upwards of increasing regulation that stifles market activity over the long term.  Rivlin's solution?  "ease the renegotiation of mortgages" "more regulatory scrutiny of financial institutions" outlaw "financial instruments... that mainly reflect the efforts of traders to outsmart each other."  Translated -- change negotiated contracts to bailout those who cannot pay; give the Fed discretionary regulatory power over all financial institutions not just commercial banks (this would include brokerage firms and investment banks as well as hedge funds and private equity funds), and outlaw any investment instrument that government officials do not understand.  Rebuttal:  1) How do we find government officials that are this smart? Is Rivlin this smart?  She is the classic Monday morning quarterback claiming she could have coached the team to victory.   2) Note the lack of detail in any of these solutions -- they all float on a cloud of well-intentioned goals (there should be no poverty, no economic pain, no death) with little or no practical sense of whether they are possible to do in practice or whether the government has informational or decision-making limits.  3)  So now all new financial instruments must pass by a bureaucrat's potential veto. Discretionary government approval of financial instruments will drive the whole business offshore.  We might as well hang up a sign saying "closed, moved to London" to the financial communty.  Good grief.  This women was at one time a senior official in the Fed?? Our best solution is to enforce the laws all ready on the books -- exact penalties for fraud and force accurate public disclosure of current asset valuations -- and let the market penalize those who have made poor market decisions.  The market needs to clear and bottom.  Government regulation that does more than penalize fraud and force public disclosure of current positions will retard us from finding the bottom.  [With the possible exception of government buyout programs such as the one used in the S&L crisis, implemented under a heavy burden of justification.]  Once the market bottoms the government can alleviate some of the suffering with means based grant in aid programs that are priced and transparent.