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Oct 10, 2008

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ZZMike

I'm not certain about the balance bewteen regulation and deregulation (are those the only two options?).

Non-regulation brought us the railroad barons of the 1800s (often called robber barons).

Maybe it is that some things need to be regulated by a government agency(but is that the only choice?), and some things are better left alone.

For some unaccountable reason, here in California, milk prices are regulated - set by some agency somehwere, but not much else that a consumer thinks about.

Then there are the public utilities - phone, electric, heating gas, &c, that seem to be regulated. Part of that is most likely because they're monopolies, and so could charge whatever they wanted.

Should banks be regulated? They're not a monopoly, and if one fails, it fails and people put their money (backed by the FDIC) somewhere else.

The problem is when really big institutions fail - like FNMA. As the old saying goes, if someone owes you $10 thousand, he's your debtor, but if he owes you $10 billion, he's your partner.

Michael W. Kruse

Mike, I agree with your questions. It is not only which things might need regulation but also which type of regulation. Some level of regulation is essential for for every industry. My intent with this post is to drive home the complexity involved. Your questions help make that point.

The conundrum is that there must be regulation but we are never able to appreciate the full impact our regulatory decisions. It is often less about right and wrong and more about risk.

VanSkaamper

Why would we think powerful politicians are somehow more saintly when it comes to greed and power than are Wall Street big wigs.

It's a national tragedy that this question doesn't even occur to so many people in our country.

This tragedy is compounded by that fact that powerful politicians are exponentially more dangerous in that they can regulate and control us via the force of law whereas a powerful, greedy big wig cannot. See Hayek on this point.

Success Professor

@ Michael - there examples of places where regulation is very effective. For example, the banking system in Canada remains very stable because of increased regulation.

@ VanSkaamper - I guess it depends on the motivation of politicians. Certainly some politicians are money and power motivated and then would be on the same level as the people on Wall Street. I would argue, however, that there are many politicians who are truly in politics to help others. These people should be able to make better impartial decisions than Wall Street and be less subject to the forces of greed.

Michael W. Kruse

Danny, I wrote:

"There is no question that economic injustices are to be expected without minimal levels of government regulation, particularly in the area of transparency and financial reporting. (Markets without regulation is not utopia but Haiti.)"

and

"So my point is that we do need regulatory reform, ..."

My attempt here was to illustrate a polarity. There are two perils: A) Too little regulation and B)too much regulation.

How do we know that Canadian banking regulation is very effective? Could it be more effective? Would more regulation make it more effective? How about a less regulation? We might be able to come to the conclusion that we are very satisfied but I don't know that we can ever conclude we are at an optimal balance of regulation.

Banking in the US is well regulated. The US mortgage industry is also regulated. It was regulation that empowered politicians to compel financial institutions to engage in risky behavior. It was lack of regulation that allowed hedge fund managers to engage in irresponsible behavior. So is the generic idea of regulation good or bad?

I agree that there are politicians desiring to good just as I believe that there are people on Wall Street of high character. I'm also convinced that sin pervades them all. I have zero confidence that politicians (as a community) will behave with any higher moral rectitude than wall street types (as a community.) Thus, the need for checks and balances with decentralized power. When inevitable corruption comes to a sector of society it is never able to get its hands on all the levers of power.

VanSkaamper

I would argue, however, that there are many politicians who are truly in politics to help others.

They swear to defend the Constitution, not to help people. (And they absolutely suck at defending the Constitution) But I'll take your statement to mean that hopefully there are many individuals there to serve the public responsibly. There probably are. But I agree with Michael that as a group I have little confidence in them.

These people should be able to make better impartial decisions than Wall Street and be less subject to the forces of greed.

Well, think the mortgage mess demonstrates otherwise...so do a host of other scandals, mistakes, and arrogant behaviors.

I see no reason whatsoever to believe that politicians, because of their career choice, are somehow less prone to give in to the dark sides of their nature than anyone else...in fact, I'd say the trappings of power make them more likely to do so...and I'd also say that history proves that to be the case.

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