Many have argued, and I think it’s a compelling argument, that ineffective supervision and enforcement of existing laws and regulations contributed to the financial crisis. By tolerating reduced transparency of risk in balance sheets and in complex institutional portfolios, as well as arbitrage around capital requirements and other prudential measures, supervision may have encouraged the underpricing of risk.
But redressing the emergent deficit in day-to-day spending was actually going to require a much larger adjustment in government revenue and spending (not least because of the degree to which boom-time tax revenue fell off).