Evaluating Policies to Prevent another Crisis: An Economist's View

I consider four policies created to address the financial crisis: (1) the ability-to-repay requirement in mortgage underwriting; (2) reform of rating agency compensation, (3) risk retention in securitization, and (4) mandatory loan renegotiation. I show that according to standard models, policies (1)-(3) do not address the standard asymmetric information problems that afflict financial markets. Policy (4) could reduce the deadweight losses associated with asymmetric information but requires that policy makers allocate gains and losses.