To Regulate or Not?, Barry Ritholtz, Big Picture

I am working on something for The Economist -- its an Oxford style debate on the current crisis. The proposition being discussed is: "This house believes that it would be a mistake to regulate the financial system heavily after the crisis."

Any comments you may have on this would be appreciated -- my final version is due later today.

My biggest problem is trying to cover a lot of ground in just 500 words . . .

DRAFT:

Over the past 30 years, the United States has moved from an environment of excessive regulation to excessive deregulation. This philosophical shift was taken to irrational extremes, and it is the heart of the current financial crisis.

A brief history: Post War World II, the global economy expanded dramatically. By the late 1960s, the U.S. had an expansive bureaucracy. Regulatory oversight had become time-consuming, complex, and expensive. Eliminating this excess regulation started with President Jimmy Carter, and dramatically accelerated under Ronald Reagan. Originally, only the most expensive and onerous provisions were targeted. But eventually, deregulation became a religion, and effective and necessary safeguards were removed along with the costly ones.

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The Reregulation Mantra?, John Stossel, RealClearPolitics

"It's deregulation's fault!"

That's the conventional explanation for the economic mess.

Barack Obama said, "This is a final verdict on the failed economic policies of the last eight years ... that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us".

Is deregulation is the culprit? It can't be. There was no relevant deregulation in the last 25 years. Meanwhile, highly regulated institutions eagerly bought risky government-guaranteed mortgages, stimulating excessive housing construction and an unsustainable price bubble.

Deregulation wasn't the problem, and reregulation isn't the solution.

It's intuitive to assume that regulation prevents problems, but it's rarely true. First, how would regulators know what to do? Leaving aside the bias they might have and the brutal fact that regulation is physical force, how can a small group of people understand the workings of a market sufficiently to regulate sensibly? Markets, especially financial markets, are far more complicated than any mind can grasp. They consist of many millions of participants making countless decisions on the basis of unarticulated know-how and intuition. To attempt to regulate such activity requires knowledge no one can possess.

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