Self-Policing Markets Or Regulation?
Harvard has a very timely article on the concept of self-policing or self-regulating markets versus government regulation. This is obviously a very timely discussion point that needs to be hashed out given the incredible mess banks now face. Unfortunately the Executive Summary of the article is short on summary but the link to the entire article is at the bottom page of the link above. I have expressed strong opinions about financial regulation in the past and have a post outlined on the topic of regulation I may or may not get up at some point.
I will say that those espousing markets to solve all ills are as inaccurate as those espousing overregulation. Thomas Paine once said the only thing worse than government was no government. In other words, leaving the world to its own devices we eventually see the outcome being man's desire to dominate his brother. We see that today in China, the Middle East, Venezuela, Myanmar and other governments where those who have anointed themselves as king-of-the-moment run these countries. Self-government is obviously preferable. The same can be said of regulation. The only thing worse than regulation is no regulation. We've seen regulation choke off the economy but we've seen no regulation result in poisons and toxins being dumped in foods and drinking water, devastation of the environment, child labor abuses, substantial work-related deaths, abusive employment practices, banking crises that have caused depressions, predatory lending and on and on and on.
There are obviously trade-offs and benefits to both approaches. I prefer regulation that promotes transparency, fairness and free market ideals before I support regulation or deregulation that allows opacity, labor arbitrage, unnecessary government meddling in the process of business and anti-competitive outcomes. The first step in regulation is to promote transparency. Depending on the act to be regulated, that may be sufficient. An example would have been transparency that allowed shareholders to see into banks and the messes they have created through proper disclosure - this would have either prevented a run on Bear Stearns or allowed it to fail because people would have known the counterparty risks to failure. Thus society could have quantified the actual risk of failure. Regulation that allows transparency and removes the conflict of interest where ratings agencies are compensated by debt issuers instead of debt buyers. Regulations allowing transparency into hedge fund activities and international capital flows.
Update: This morning New York's Fed President Geithner embraces an overhaul of financial regulation.
Unfortunately, I don't support Geithner's position that the Fed should be the beneficiary of that oversight. Or his support for Paulson's plan which is nothing more than reinforcing the status quo. While Geithner impressed many with his public speaking skills when called before Congress to explain how this mess could happen, his remarks today clearly show a lack of understanding and sophistication as it pertains to the Fed's contribution to this crisis vis-a-vis lack of regulatory oversight.
We need oversight that includes increased transparency. While I support Bernanke's attempt to save the banking system - although doing so has likely created a bigger commodities mess - I do not support the Fed as an oversight agency as it is the antithesis of transparency. In other words, if the Fed wants more regulatory control, we should first see the Fed overhauled to increase its transparency and oversight by society. We already now see that a group of twelve bureaucrats have no more insight into what should and should not happen in our banking system. The cumulative oversight of society can and would surely do a much better job. Let's make the Fed accountable just as the banking system should be held accountable to society. While we are at it, let's make government work again by increasing its transparency so we know what lobbyists are doing and how they are impacting our economy.
I will say that those espousing markets to solve all ills are as inaccurate as those espousing overregulation. Thomas Paine once said the only thing worse than government was no government. In other words, leaving the world to its own devices we eventually see the outcome being man's desire to dominate his brother. We see that today in China, the Middle East, Venezuela, Myanmar and other governments where those who have anointed themselves as king-of-the-moment run these countries. Self-government is obviously preferable. The same can be said of regulation. The only thing worse than regulation is no regulation. We've seen regulation choke off the economy but we've seen no regulation result in poisons and toxins being dumped in foods and drinking water, devastation of the environment, child labor abuses, substantial work-related deaths, abusive employment practices, banking crises that have caused depressions, predatory lending and on and on and on.
There are obviously trade-offs and benefits to both approaches. I prefer regulation that promotes transparency, fairness and free market ideals before I support regulation or deregulation that allows opacity, labor arbitrage, unnecessary government meddling in the process of business and anti-competitive outcomes. The first step in regulation is to promote transparency. Depending on the act to be regulated, that may be sufficient. An example would have been transparency that allowed shareholders to see into banks and the messes they have created through proper disclosure - this would have either prevented a run on Bear Stearns or allowed it to fail because people would have known the counterparty risks to failure. Thus society could have quantified the actual risk of failure. Regulation that allows transparency and removes the conflict of interest where ratings agencies are compensated by debt issuers instead of debt buyers. Regulations allowing transparency into hedge fund activities and international capital flows.
Update: This morning New York's Fed President Geithner embraces an overhaul of financial regulation.
Unfortunately, I don't support Geithner's position that the Fed should be the beneficiary of that oversight. Or his support for Paulson's plan which is nothing more than reinforcing the status quo. While Geithner impressed many with his public speaking skills when called before Congress to explain how this mess could happen, his remarks today clearly show a lack of understanding and sophistication as it pertains to the Fed's contribution to this crisis vis-a-vis lack of regulatory oversight.
We need oversight that includes increased transparency. While I support Bernanke's attempt to save the banking system - although doing so has likely created a bigger commodities mess - I do not support the Fed as an oversight agency as it is the antithesis of transparency. In other words, if the Fed wants more regulatory control, we should first see the Fed overhauled to increase its transparency and oversight by society. We already now see that a group of twelve bureaucrats have no more insight into what should and should not happen in our banking system. The cumulative oversight of society can and would surely do a much better job. Let's make the Fed accountable just as the banking system should be held accountable to society. While we are at it, let's make government work again by increasing its transparency so we know what lobbyists are doing and how they are impacting our economy.
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