Self Inflicted Wounds

How did we get in this mess? And how can we avoid it in the future? Floyd Norris has the right idea in the New York Times:

Allow me to propose a simple principle that the next president and Congress could follow as they devise a new financial regulatory regime to replace the one that failed so badly:
If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated.

As the financial markets crumbled from the unraveling of billions in credit default swaps, Securities & Exchange Commission chairman Christopher Cox swung into action, not by challenging the reckless behavior of the banks themselves, or by questioning the regulatory regime that let them wreck our financial markets, but by going after the short sellers who were betting the banks' stocks would tumble. (Short sellers bet that stocks will go down, usually in anticipation of bad news.) The SEC this morning issued a temporary ban on shorting 799 financial stocks.
Norris has scathing words for Cox's fixation on the shorts:

Had the S.E.C. gone over the records of Lehman and Bear Stearns with the vigilance it now promises for the shorts, we might not be in this mess.

It's commonplace for companies in trouble to blame those betting they will fail instead of their own mismanagement. But blaming the shorts for bringing down an entire sector is absurd. Let's be clear: Our financial system is failing, not because some skeptics took short positions on the big banks, but because the banks were badly managed while our regulators looked the other way. The banks weren't done in by the shorts, but by self inflicted wounds.