In his latest Ideas Matter update, Max Borders focuses on a video from historian Niall Ferguson that points to an inherent contradiction in federal government policies involving banks.

On the one hand you have a regulatory approach that seeks to re-capitalize and tighten up large lending institutions. On the other hand, you have a macroeconomic stimulus approach that requires more of the same kind of lending that creates bubbles and/or seeks to ‘get the economy moving’ as macroeconomists are fond of saying.

So how do you get out of this dilemma?

I’m no economist. So take what I say with a grain of salt. But the only way we’re going to get on a path to prosperity again is to:

A) Stop the regulatory strategy that aims to tighten banks from the top-down (while giving them perpetual bailout guarantees). That means getting rid of last-resort bank guarantees that cause moral hazard.

B) Stop stimulating. The market needs to find whatever bottom it needs to find.

C) After the excess capacity and froth from any bubbles is cleared away, the system of prices for goods, services and credit can purge itself of distortions.

D) Focus on austerity and institutional rules that encourage entrepreneurship, rather than macroeconomic fancies or political resource allocation. Create rules that allow for healthy flows: keep or return taxes to reasonable levels; reduce government spending; start regulatory review (and a subsequent purge of excessively burdensome regs); focus on core state functions; let bad banks and businesses fail; direct any welfare spending only to the most vulnerable in society.