A group of economics professors have cautioned Congress against indulging in a rush to judgment on financial reform.  Focusing too much on vengeance instead of diagnosis may be causing Congressional leaders to regulate the wrong things and ignore the real systemic risks:

“Until we understand what the causes were, we may be implementing ineffective and even counterproductive reforms,” said Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology. “I understand the need for action. I understand the need for something to be done. But what I expect from political leaders is for them to demonstrate leadership in telling the public that we need to proceed about this in a much more deliberate and rational and thoughtful way.”

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A diverse group of critics, however, say the legislation focuses on the precipitators of the recent crisis, like abusive mortgage lending, rather than the mechanisms by which the crisis spread.

In addition to populist imperatives that provide political incentives for targeting “the usual suspects” instead of the actual sources of systemic risk, there may be an element of political protecting shielding some major players in the mortgage industry:

Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac.

Moreover, hedge funds, which field a bipartisan set of very powerful lobbyists, seem to be getting a pass in spite of their prominent role in bringing down Bear Stearns and their lucrative exploitation of the crisis as it unfolded.

This kind of game is very dangerous.  Indulging in scapegoating and political payback runs the risk of failing to correct the real deficiencies in the financial system or, worse, provoking another panic as investors react in unpredicted ways to a raft of ill-considered and burdensome regulations targeting the wrong gears in the complex financial machine that underlies the still-fragile U.S. economy.  The fact that few Congressional representatives have any significant understanding of basic economics adds to the danger that a politically motivated reform package, buttressed by the political use of the SEC showcased in the Goldman Sachs show trial, could torch the U.S. economy in order to save it.

Congress needs to slow down on financial reform.  And if it takes a filibuster to do it, that would be an act of political courage, not malevolence.  Being “the party of no” may be a good thing when the other party is rushing headlong into the unknown.

The author welcomes serious comments by email.  Partisan talking points will rush headlong into a wall of apathy overseen by an evil black cat.