By Scott Summer

At a recent economics conference I came across a fascinating paper by Eugene White, which discussed how incentives built into banking during the National Banking Era helped reduce risk taking.  The paper changed my views more than anything else I’ve read in recent years.  Here’s a few excerpts:

The Dodd-Frank Act of 2010 exemplifies this confusion. Few observers believe that the bill will provide a lasting reform of the American financial system, and many suspect that it will sow the seeds of the next financial crisis. By focusing on the regulation of choices made by borrowers, depositors, shareholders, and bankers, the Act repeats the mistakes made by previous reform legislation. Instead, reform should focus on changing the incentives that parties face to insure that they are correctly aligned to induce the development of less fragile institutions.

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Perhaps, the most important but least heralded change in the ten years prior to the 2008 crisis was the shift by most major investment banks from partnerships to limited liability corporations.

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