A Crisis Of Politics, Not Economics:
Complexity, Ignorance, And Policy Failure
07/16/09 - Critical Review by Jeffrey Friedman (PDF)
(Via Cafe Hayek)
The abstract summary seems right to me. Edited.
- The financial crisis was caused by the complex, constantly growing web of regulations designed to constrain and redirect modern capitalism.
- This complexity made investors, bankers, and perhaps regulators themselves ignorant of regulations previously promulgated across decades and in different “fields” of regulation.
- These regulations interacted with each other to foster the issuance and securitization of subprime mortgages; their rating as AA or AAA; and their concentration on and off the balance sheets of many commercial and investment banks.
- As a practical matter, it was impossible to predict the disastrous outcome of these interacting regulations.
- Government has attempted for 100 years to create a hybrid capitalism in which regulations are supposed to remedy economic problems as they arise. This may be impossible to do in practice due to complexity.
Motto of government: Let's have 50 more regulations and see what happens.
I see the government as falsly advertising that they have produced trustworthy systems. This leads people to trust the governmnet, drop their guards, and be hurt more badly than if they had been prudent and skeptical.
The government creates the idea that regulation makes a business trustworthy even if parts of the business are hidden from investors. In fact, only open disclosure and public audit can give confidence in a business.
The Bernie Madoff theft shows this. People trusted in the Securities and Exchange Commission (SEC) to investigate Madoff and find any fraud. The SEC did investigate him twice, and found nothing. They excused themselves by saying that they really didn't have the resources to find fraud.
While not helping much, regulations cost $trillions.
The Madoff Scandal Exposes Government Failure
07/17/09 - Future of Freedom Foundation by Sheldon Richman
[edited] No matter how much the government controls the economic system, any problem is blamed on small zones of freedom. The government can’t possibly monitor and regulate everything in a country, but it claims that it must. Anything that displeases the government can be an excuse for stamping out whatever freedom still exists.
A false sense of security is worse than none at all. People are more vulnerable to scams when they believe government is protecting them, because they relax their efforts to protect themselves. The government broadcasts one unmistakable message: Have no fear because Big Brother is watching over you.
Free-market advocates do not claim that we need no protection from the unscrupulous. Rather, protection is maximized by undiluted market discipline, profit, loss, and buyer-beware skepticism.