But there ARE examples of more regulation equalling less risk. The FDA, ICC, FTC, NHTSA and other federal agencies regulate industries successfully. They introduce standards and transparency that overcomes much fraud, increases public safety, provides legal avenues for consumers, promote growth, etc. Regulation may be risky, but lack of regulation is not risky, it is certainty of systemic failure. The first move, and the the one which would have prevented much of the damage of the current dip, is the repeal of the Glass Steagall Act. Lack of transparency regulation allowed the biggest offenders to hide their faulty activitiies.No, financial regulation is necessary to keep the normal market ups and downs within manageable range.
Regulating Risk is Risky Business
Just how hard will it be to reform Wall Street?
Jun 5, 2009 | Updated: 12:40 p.m. ET Jun 5, 2009
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"Certainly do not give a systemic regulator the job of determining when the next financial crisis will hit," Alan Greenspan said in a speech at the American Enterprise Institute. The federal government does not appear to think the former Fed chief has any idea what he is talking about.
Several news services have reported that the Administration will announce its new plan to regulate financial markets as soon as mid-month.
The programs being suggested by the Treasury would give the Fed the job of of monitoring risk in the credit and financial system and the FDIC the power to restructure large financial firms that get into trouble that the free markets may not be able to fix. The FDIC, by extension, would be allowed to judge the efficiency of the markets to handle their own problems.
The new structure of the financial regulatory system is based on the misapprehension that more regulation equals less future risk. There is certainly no sign the government was able to warn banks about their investments in Latin American debt which almost brought down Citibank in 1982 or the S&L trouble that claimed 745 savings institutions in the late 1980s and early 1990s. Each incident brought more regulation, and there is no sign that the addition of government risk management agencies and policies helped to predict or prevent the global credit crisis that began two years ago.
The notion that more regulation means less risk is based on the simple premise that more analysis means better forecasting. The global financial and credit markets are so complex and the effects of changes in the value of private debt and sovereign debt happen so quickly and frequently that keeping tabs on them and getting out in front of problems is nearly impossible.
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