The Myth of Lax Regulation

Friday's Wall Street Journal contained an editorial by George Akerlof and Robert Shiller entitled, "Good Government and Animal Spirits."

Their editorial essentially argued that effective capitalism requires rules and regulations. From their tone, one would get the sense that the authors believe this is not universally believed.

They contend, in the fourth paragraph of their piece,

"The debate about the proper role of government in the economy goes far back in American history. At the beginning of the 19th century, the Democrats were fiercely opposed to government intervention, while the Whigs thought that the government should provide the backdrop for a healthy capitalism.

Controversy about the proper relationship of the government and the economy has continued since then."

Fair enough, and correct. But then the authors go on to allege, concerning the recent financial sector excesses,

"The regulatory failure led to a profound systemic instability in our economy, which accounts for the severity of our economic crisis. Devising new regulatory structures that will allow financial innovation to proceed and yet prevent new such systemic problems is the major challenge to our creative capitalism today.

Public antipathy toward regulation supplied the underlying reason for this failure The U.S. was deep into a new view of capitalism Americans believed in a no-holds barred interpretation of the game.

....and American financial regulation hasn't had an overhaul in 70 years."

On this, I disagree totally with Messrs. Ackerlof and Shiller.

If there was regulatory failure, and there was, it's not necessarily true that the solution is new regulation or structures. Further, the public wasn't antipathetic to regulation- Congress and the various agencies were. Finally, I'd hardly call Sarbanes-Oxley descriptive of 'no-holds barred' capitalism, would you?

Between lax Congressional oversight of mortgage giants Freddie Mac and Fannie Mae, the senseless redaction of Glass-Steagal by Clinton Treasury Secretary Bob Rubin, at Sandy Weill's behest, and a failure of the Fed, FDIC and OCC to properly examine, supervise and halt improper mortgage lending practices, we can safely say that the problem isn't a lack of regulations. It's a failure of people in the system to do their job.

Rather than setting to work to design new regulations, as Ackerlof and Shiller recommend, I would suggest that the first order of business is to identify the people and processes which existed to regulate the financial excesses of the past few years, but failed to do so, and consider how better to assure that these failures will not recur.

Does anyone seriously believe that simply passing new laws will result in any better outcomes than occurred under old, largely adequate laws, which were improperly administered and enforced?