Tuesday, October 14, 2008

Meltdown: Who To Blame? Not Deregulation...

John Stossel nails it in this piece: The Reregulation Mantra?

As I said in my commentary on the McCain-Obama 2nd debate, Obama's mantra of "deregulation was the cause this meltdown" is false. We have regulation in place already. That doesn't prevent politicians from steering the ship awry. The democrats blocked all reform of Fannie Mae, and practically accused the main regulator of Fannie and Freddie of being stupid and racist. Regulation was in place, and it didn't work. Maybe we could regulate the Democrats.

Stossel astutely makes the argument in his piece that deregulation was not the cause at all, and why effective regulation itself is a myth.


Barack Obama said, "This is a final verdict on the failed economic policies of the last eight years ... that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us".

Is deregulation is the culprit? It can't be. There was no relevant deregulation in the last 25 years. Meanwhile, highly regulated institutions eagerly bought risky government-guaranteed mortgages, stimulating excessive housing construction and an unsustainable price bubble.

It's intuitive to assume that regulation prevents problems, but it's rarely true. First, how would regulators know what to do? Leaving aside the bias they might have and the brutal fact that regulation is physical force, how can a small group of people understand the workings of a market sufficiently to regulate sensibly? Markets, especially financial markets, are far more complicated than any mind can grasp. They consist of many millions of participants making countless decisions on the basis of unarticulated know-how and intuition. To attempt to regulate such activity requires knowledge no one can possess.

In other words, the planner or regulator can't possibly know what the multitude in a market "knows." So what regulators really do is straitjacket market participants, preventing innovators from creating prosperity for us all.

The current interventions prevent market participants from adjusting to new conditions. Banks might be willing to sell their shaky loans to investors at a steep discount, but why do that if the government might bail them out?

Markets are never perfect. They are made up of people making their best judgments, and people's judgments are never perfect.

There is only one genuine protection for the public: the discipline of profit and loss. Nothing concentrates the mind like the prospect of bankruptcy.

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