Sunday, June 28, 2009

The Problem with Regulations that Rely on "Smart" Regulators

I'm worried about the new interventions being placed on markets in the US. The genius of American growth has been its ability to match innovation with markets - but the growth of government means that barriers are rising - barriers similar to those of chronically stagnant Europe.

What makes it more irritating is the demagoguery blaming the crash on supposed "laissez-faire" and to top it all off, these new regulatory and tax interventions may end up making the situation worse (or create yet new bubbles that will burst even more spectacularly). It's almost inevitable at this point that there will be higher taxes necessary to pay for the plethora of spending and on top of that, politicians are starting to roll out "smart" regulations that will supposedly moderate the excesses of the market (ignoring the bad regulation and interventions that got us into this mess in the first place).

In centralizing power, for the current batch of new regulations to work relies on the discretion of regulators who are hardly infallible. As pulled by the WSJ's Deal Journal:

We regulate because financial systems are fragile, prone to booms and busts that can have harmful effects on the real economy. But regulators aren’t immune to the boom-bust cycle. They have an understandable habit of easing up when times are good and cracking down when they’re not. In doing so, they often amplify the ups and downs of markets rather than modulate them.

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