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Tomorrow’s financial crisis today

Most Americans probably don't care much about yesterday's move to recognize Jerusalem as the capital of Israel, but the decision-making process that went into it is crucial to understand.

Even as they previewed the move, administration officials seemed unable to offer any kind of account of why this would help the United States. Instead, the focus was on the idea that critics of the move are overstating the prudential case against it. Annie Karni quotes a source who said Jared Kushner's view is that "after all the posturing and a few days of riots, things go back to normal when it comes to the negotiations."

Josh Rogin reports that Secretary of Defense Jim Mattis thought it was a bad idea.

The problem here isn't so much that Kushner is wrong. It's that even though he's right, this is a loopy way to make policy. Probably the whole thing will blow over. Nobody in the region regards the US as an honest broker on Palestinian issues anymore anyway, and most regional leaders don't care nearly as much about the Palestinian issue as they used to. But the upside here is nonexistent, and the potential downsides are large. It's a bet with clearly negative expected value, except it's the American people who are holding the downside.

Which brings me to reports that Trump is looking to slash staff and funding levels at the Treasury's Office of Financial Research.

You would not think that just 10 years after a massive financial crisis the American government would be moving aggressively to dismantle prudential regulation of the banking system. But that's what they are doing here. OFR is the agency that's supposed to be the Treasury's eyes and ears. It helps the department understand how financial markets are evolving and where new vulnerabilities may arise. Trump wants to blind the government — not really to save money; the cash involved is trivial — but to make it easier for banks to get away with problematic conduct.

Meanwhile, Trump's pick to run regulatory policy at the Fed wants to let banks take on more risky debt. He's tapped a bank executive responsible for all kinds of shady foreclosure practices to run the Office of the Comptroller of the Currency.

The nature of a banking crisis is you probably won't have one in any given year, regardless of how shoddy your regulatory framework is. As long as asset prices are trending upward, it just doesn't matter. In fact, as long as asset prices are trending upward, a poorly regulated banking sector will be more profitable than a well-regulated one.

It's all good. Unless things blow up. But if your bad policymaking takes us from a one-in-500 chance of a blow-up in any given year to a one-in-20 chance, you're still in a world where things will probably be fine across even an entire eight-year span in office. Probably.

Trump has taken a lot of risky bets in his life. And though he's often lost, he's usually been insulated by his inherited wealth and by his very real skill at structuring deals so other people end up holding a lot of the downside. Any presidency inherently has that kind of structure with or without skill. Presidents suffer when they make mistakes, but other people suffer more. Throughout 2017, America has mostly enjoyed some pretty good luck and a rising economic tide. I hope it holds up.

This is an abbreviated web version of The Weeds newsletter, a limited-run policy newsletter from Vox’s Matt Yglesias. Sign up to get the full Weeds newsletter in your inbox, plus more charts, tweets, and email-only content.

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