Regulation Fails

"The claim that dergulation went too far is coming from many sides. We need more regulation, the argument goes, and even a single regulator to bring stability. Former SEC chairman, Arthur Levitt, Jr., made some of that case on this page. ... Their diagnosis is wrong. Mistaken regulation contributed greatly to the current problems in financial markets. Take the 1970s Basel agreement between developed country governments, which followed bank failures in Germany and the U.S. ... Risk moved to all corners of the global marketplace. We find out who holds the risky assets when they announce they are about to fail. ... The first principle of regulation is: Lawyers and politicians write rules; and markets develop ways to circumvent these rules without violating them. ... The perennial argument of regulators is: 'If I only had more power ...' Not so. Regulators did not see the chicanery at Enron. Nor did they prevent the dot-com bubble or the Latin American debt probelms in the 1980s. A main reason is 'capture'-when the interests of the regulated dominate the interests of the public. ... The financial system cannot survive is the bankers make the profits and the taxpayers take the losses", Allan Meltzer at the WSJ, 27 March 2008.

"Sucessful attempts to shift the responsibility for bad decisions towards others and to society more generally create a 'moral hazard' in behavior. If individuals are not held accountable for decisions and actions that harm themselves or others, they have less incentive to act responsibily in the first place since they will escape some or all of the bad consequences of their actions", Gary Becker at the WSJ, 22 March 2008.

I agree with AM. He raises one of my major themes: regulatory capture. The Los Angeles investment group I was a member of from 1988 to 2006 saw: Enron and the dot com problems years before they blew up. See my 27 July 2007 post.

Gary Becker's absolutely correct. This is much of what is behind Hank Paulson's "reform plan", i.e., to increase the potential for Wall Street bailouts.