The problem hasn't been an inability to impose losses, it has been an unwillingness. The Frank proposal does nothing to change that, continuing the Fed's discretion to decide whom to bail out and how to bail them out. So while Rep. Frank, as well as President Obama, claims his framework will protect the taxpayer and eliminate the need for bailouts, nothing could be further from the truth

The Frank-Obama plan all but guarantees that the resolution of large firms will be dictated by politics, rather than rule of law. The plan would allow a political body to decide which contracts to honor and whom gets paid first. Contracts and legal precedent will be abandoned for the whims of politics, making the pricing of debt and equities securities more complex and less efficient, raising the cost of capital with a resulting reduction in economic activity.

The proponents of the tax credit believe we need to replace the decline in speculative demand for housing...with yes, new speculative demand for housing. This analysis could not be more flawed. The tax credit largely acts to keep housing prices from falling further. However, that is how markets are supposed to clear in an environment of excess supply. If there's too much housing, the way to address that is to allow housing prices to fall, which attracts buyers back into the market.

We should also recognize that the tax credit does not help the buyer—it helps the seller, by allowing the seller to charge that much more for the price of the home.

Perhaps the worst impact of this policy is that it encourages the continued building of homes, only adding to the over-supply, which itself will protract and extend the recession. Witness the recent news that housing starts in the U.S. just hit a nine-month high. While these levels are still low in historic terms, and housing inventories are declining, we still have an excess of housing. The damage done by creating a false floor to housing prices is that builders don't respond to inventory, they respond to prices, and as long as there is a positive gap between prices and construction costs, builders will build. The tax credit only serves to widen that gap between prices and construction costs.

The central flaw in the thinking behind the tax credit proposal is its assumption that we need to re-inflate the housing bubble. The previous level of housing demand, from say 2003 to 2006, was not driven by fundamentals. There had to be a correction in the housing market. Our choices are to either absorb that correction quickly and move on, or to prolong that correction, maybe even making it worse, by trying to create a false floor to the market.

Perhaps this proposal's greatest flaw is that it will do nothing to avoid the next financial crisis and would not have avoided the current crisis.

The housing bubble was driven by a lack of equity on the part of borrowers, coupled with a speculative bubble in housing and increased unemployment resulting from the bursting bubble. Nothing in this proposal would require borrowers to actually have "skin in the game." In fact, the proposal would increase the chance of future bubbles by allowing borrowers to keep the upside of speculative credit activity, while pushing even more of the downside risk onto others.

The proposal also begins a dangerous new precedent for legislation: the agency's activities would not be funded by appropriations, as is, say, the Consumer Product Safety Commission. It would be largely funded by the Federal Reserve's balance sheet. This will eliminate any accountability of the agency to the American public, just as the Fed's bailouts have lacked transparency and accountability.

The new agency would have almost unlimited power to decide which industries and products are covered, with the exception that products offered by Wall Street—the very Wall Street at the center of the financial crisis—would not be covered and would continue to be regulated by the Securities and Exchange Commission (SEC).

On the Expedited CARD Reform for Consumers Act of 2009:

Credit cards allow the un- or under-employed to spend now out of future expected income, which is key during a financial downturn. But the credit "reform" proposal under consideration would have the effect of limiting credit solely to the financially stable, leaving those most in need outside of our formal financial system. This would force needier households to borrow from less efficient, and often more costly, sources, such as friends and family, or pawn-shops and loan sharks. The trend in recent months of households shifting away from mortgage debt to credit card debt has been essential in allowing households to maintain spending in the face of declining home values; absent such spending, our economy would be in even worse shape.

Of course, financial contracts are like any other form of contract: they should not be allowed to abrogated by courts merely on the basis of politics.

The truth is that the President's plan would permanently put the "too big to fail" tag on a small, select group of companies. These companies would see their funding costs decline, allowing them to gain market-share at the expense of their rivals, making these firms even larger. Greater concentration in our financial services industry is the last thing we need, yet the Obama plan all but guarantees it.

Obama also chooses myths over facts. The president claims that de-regulation and competition among regulators caused the crisis. The facts could not be more different. Those institutions at the center of the crisis—Fannie Mae, Freddie Mac, Bear Stearns, Lehman—could not "choose their regulator," as the president put it.

The president's plan chooses convenient targets and protects entrenched interests, rather than address the true underlying causes of the crisis. At no time have we heard the president discuss the expansionary monetary policies that helped fuel the bubble. Nor has the president talked about the global imbalances—the global savings glut that poured surplus savings from the rest of the world into the U.S. But then the president appears to hope that loose monetary policy and continued American consumption funded by China will get him out of his own political problems with the economy. It is especially striking that the President makes little mention of the housing bubble, as if it was only the bust that was the problem.

Without real reform—fixing Fannie and Freddie, scaling back the massive subsidies for leverage in our tax code, loose monetary policy—it will only be a matter of time before the next crisis hits. If we implement the President's plan, we will, however, guarantee that the next crisis will be even larger and severe than the current one.

Bernanke, along with Secretary Geithner (then New York Fed president) were the prime movers behind the bailouts of AIG and Bear Stearns. Rather than "saving capitalism," these bailouts only spread panic at considerable cost to the taxpayer. As evidenced in his "financial reform" proposal, Obama does not see bailouts as the problem, but instead believes an expanded Fed is the solution to all that is wrong with the financial sector. Bernanke also played a central role as the Fed governor most in favor of easy money in the aftermath of the dot-com bubble–a policy that directly contributed to the housing bubble. And rather than take steps to offset the "global savings glut" forcing down rates, Bernanke used it as a rationale for inaction.

Perhaps worse than Bush and Obama's rewarding of failure in the private sector via bailouts is the continued rewarding of failure in the public sector. The actors at institutions such as the Federal Reserve bear considerable responsibility for the current state of the economy. Re-appointing Bernanke sends the worst possible message to both the American public and to government in general: not only will failure be tolerated, it will be rewarded.

Even while correctly identifying the "global savings glut," Bernanke sat by and did nothing about the unsustainable build-up of leverage in the housing market—the "bubble" which famously burst in late 2008. Bernanke also used Fed financing to bail out Bear Stearns and AIG—hotly political moves which should rightfully have been left to Congress—and oversaw the massive expansion of the Fed's balance sheet from about $900 billion to over $2 trillion. Under Bernanke, the Fed has transcended monetary policy and bank supervision into the world of fiscal policy.

While thus politicizing the Fed on one hand, Bernanke has sought to insulate the bank from congressional pressures by appeasing majority Democrats with various new credit regulations. Both the recently proposed credit card and mortgage rules unnecessarily restrict credit and increase the litigation risk facing banks, while doing nothing to roll back some of the irresponsible lending policies that exacerbated the housing bubble.

Bernanke's pandering to the Left on misguided "consumer protections," and the absence of any debate over the Fed's role in the housing bubble, raise serious questions as to whether Bernanke understands the causes of the current financial crisis. We cannot hope to avoid the next financial crisis without a Fed chairman who understands the current one.

Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.

Instead of addressing our destructive federal policies aimed at extending homeownership to households that cannot sustain it, the Obama plan calls for increased "consumer protections" in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower's equity. However, such recognition would also require admitting that the government's own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.

While the Administration plan recognizes the failure of the credit rating agencies, it appears to misunderstand the source of that failure: the rating agencies' government-created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the outsourcing of their own due diligence to the rating agencies.

The Administration's inability to admit the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.

In letting some banks leave TARP while keeping others, the Treasury also risks picking winners and losers, for any banks not freed from TARP will likely be perceived as troubled. With some of the more stable TARP banks, the government may also get its money back. As these banks repay their TARP funds, there will be increasing pressure from both the financial sector and the non-financial sector to spend TARP funds elsewhere. The Treasury Secretary should commit to returning all re-paid TARP funds to the general Treasury. If Treasury is unwilling to do so, then Congress should eliminate Treasury’s ability to make any additional TARP purchases or investments. The time is long past for both Congress and Treasury to design an exit strategy.