Kling on Financial Regulation

Arnold makes several good points, including this one:

In the interview, President Obama says,

I think you've got a broader structural problem in our economy in which our last two recoveries had been based on bubbles, and a massively overleveraged consumer, a massively overleveraged corporate sector, and a financial system that didn't have much restraint.

Both the President and the white paper blame this excess leverage on greed and faulty compensation structures. What about taxes and subsidies? Our high corporate tax rate, along with the deductibility of interest for corporations, encourages corporations to look for ways to minimize equity financing. For individuals, government-subsidized mortgages and the tax deductibility of mortgage interest help to encourage over-leveraging.

As they say, read the whole thing.

By the way, if we had an ideal tax system--something along the lines of the Hall-Rabushka flat tax--there would not be incentives for corporate and individual leveraging.