Reply #30: I don't know how to best handle it. And I'm not going to pretend to know what to do at the moment. [View All]

[JVS]

I suspect that to really clean up the problem that has been made a much more interventionist policy would have to be made than merely ending the deduction (which I didn't advocate in this thread). This policy would be much more complicated than to be able to be sketched out in the few minutes I have to dedicate myself to this problem today. That doesn't change the fact that instituting the deduction has proven to be a bad policy decision. Nor does it change the fact that we should look into how to mitigate the damage it has done by figuring out how to get rid of it or by adding the kind of oversight that would have prevented it from just being more fuel on the fire.

About timing: While it's baked in, as you say, there are few better times to solve the problem than when a bubble has popped. Any attempt to reform this while a bubble is inflating would trigger a collapse of the bubble. The same argument could have been made against starting mandatory participation and payments into FDIC depositers' insurance by the weakened banks of the depression. Doing it now would help keep this policy from contributing to another repetition of the crisis.