Sept. 15 (Bloomberg) — There was a lot to like in President Barack Obama's speech yesterday on reforming financial regulation.

But he got one big thing wrong: incentives. And without the right incentives, market players will continue to game the system in the very fashion that the president deplored.

Consider the sort of legislation that yesterday's speech signaled the country will get. Speaking at Federal Hall in New York, the president talked about the need for a consumer financial protection agency. So far, so good. There's nothing wrong with such an agency per se. From ratings companies to mortgage brokers, authorities did trick consumers. So some kind of watchdog creating a disincentive for treachery seems welcome.

There's also nothing wrong with the president's plan to unify regulation so that market players may no longer, as the president accurately put it, "shop for the regulator of their choice." In the balmy 1990s it was possible to make believe that less regulation of exotic new financial products meant more genuine growth, and that competing regulatory jurisdictions made for higher quality regulation.

Now that we know that the taxpayer will be on the hook for many of the companies that enjoyed such light regulation, this case is no longer compelling.

Here, again, a more consistent monitor represents a disincentive to cheat.

Finger-Pointing

Though the president pointed his finger at Wall Street, not regulators, he offered up a change that would discourage federal offices from sudden rescues or unexpected non-rescues whose very arbitrariness worsened the crisis. His plan for stronger "rules of the road" for individual companies in trouble is therefore especially welcome.

Also commendable is the administration's plan to increase capital and liquidity requirements for larger institutions whose collapse might be a burden on the overall financial system. That seems all right. If you're going to promise to rescue banks, brokerages or manufacturers, as Washington has, you might as well force those businesses to become tougher, smaller, and therefore less susceptible to failure.

But two other components of Obama's speech further skew already skewed market incentives. The president would like to create a "resolution authority" to oversee and corral entities whose failure might pose systemic risk. The president says this would put an end to the so-called too big to fail rule, presumably by making their failure impossible. But rather than end it, this last step institutionalizes too big to fail.

Special License

Presumably a number of financial companies or banks will be monitored by the new resolution authority. Their very ambiguous status will imply special license. In other words, instead of abolishing Fannie Mae and Freddie Mac, Obama is leading Washington in creating dozens of new ones.

The second incentive problem, yet larger, involves the Federal Reserve system itself. A number of economists are now arguing that the Fed's interest-rate policy in the middle of this decade was too easy, and therefore gave rise to our housing bubble. John Taylor, a former Treasury official, makes the most eloquent case for this in an article in the periodical Critical Review.

One incentive for the Fed to be so easy was its overly broad statutory mandate, which charges it not only with managing monetary policy but also with keeping an eye on growth. The ideas Obama is formulating haven't become law yet, but they clearly include a yet larger role for the Fed.

Hedge Funds

There's also something unfocused about the president's perception of the market. Hedge funds, which weren't responsible for the financial system's troubles, are in need of constraints, in Obama's view. He doesn't seem to like that they can "operate outside of the regulatory structure altogether."

Obama sees a need to expand the role of the Fed, one of the most culpable players. The various checks the president describes — an oversight council to review Fed action or coordinate with the Fed — don't offset the new Fed firepower the president is describing.

The last problem involves a missing incentive — the incentive to grow. If the U.S. is to have even a chance of getting past its projected deficits of 11 percent of gross domestic product, or its nightmare debts, it has to grow like an emerging market country.

Such growth is conceivable, precisely because of the crisis. As scholar Amar Bhide has pointed out, turmoil like the past year's also opens the door for the kind of innovation that can speed growth. Yet with his hostility to risk, the president almost guarantees that the very innovators who could propel the country forward will be leashed and muzzled.

Slower Growth

The slower growth rate that comes with Obama's policies ensures a heavy tax burden even without another market crisis — or just as likely, a dollar crisis. The president argued that "those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall."

But his plan does too little to prevent such a next time, and it ensures that taxpayers will indeed be the ones breaking that fall.

(Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression" is a Bloomberg News columnist. The opinions expressed are her own.)

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