The second proposal is to extend something like the caps that already prohibit banks from holding more than 10% of federally insured deposits, to other kinds of liabilities. I asked, but got no clarity, on what exactly this means. Are regulators going to swoop in whenever a diversified financial institution has too big a share of the total liabilities in all US debt markets? Or are they going to intervene when a bank becomes dangerous to one particular debt market, the way Lehman turned out to be in commercial paper?

One thing is clear, though: the banks screwed up. As I've been saying for months now, it was a simply gigantic mistake to seek huge profits and big bonus pools. Yes, I know that they were competing for talent with foreign banks. Well, they kept the talent, and now it looks like they may well lose the profitable lines of business that they needed the talent for. Last time I looked, Goldman's proprietary investments made up something like 90% of its profits. Do they give up their profits, or their implied government guarantee? Either move is going to hurt, which is why, despite reporting record profits today, Goldman's stock is down 4% at this writing.

Now, as to the merits of the policy: is it a good idea? On first pass, I'm going to say tenatively yes. The government is recognizing that banks "paying back" the funds they were given is essentially meaningless, because they've still got a very, very valuable implied government guarantee. One could argue that they've had it since 1991 when the Federal Reserve got the power to loan money to investment banks in extremis. But since last fall, it's the next best thing to explicit. That means the government needs to take steps to mitigate its own risk.

The way you do that is to decouple the key operation the government insures--the funneling of credit from those with money to those who want to borrow it--from making bets on market outcomes that can go badly wrong. And to ensure that no institution has enough liabilities to take down the system if it fails.

That said, I'm not necessarily confident that this is going to work. I'm not even sure that I understand how it will work at this point. I have only a hazy understanding of how the liability limits will be enforced, and after talking to administration officials, I'm not sure that they really know either; they seem to be waiting to see what the legislators and regulators say. And while splitting off proprietary investment seems like it might mitigate systemic risk, it may be very hard to enforce. Would "eating your own toxic waste" be prop trading, or client service, for example? It's possible that this thing will end up with loopholes you could drive a truck through, and if so, it will probably be worse than nothing.

Too, I haven't talked to any prop traders or investment banking executives this morning. They might be able to offer a convincing reason we shouldn't do this.