An Occasional Crisis is the Cost of Innovation: The Case Against New Regulation of Financial Markets
THE ECONOMIST–Bold re-regulation could damage the very economies it is designed to protect. At times like this, the temptation is for tighter controls to rein in risk-takers, so that those regular, painful crashes could be avoided. It is an honourable aim, but a mistaken one.
A sophisticated and innovative financial system is susceptible to destructive booms; but a simple, tightly regulated one will condemn an economy to grow slowly.
The tempting answer is to try to wriggle free from the dilemma with a compromise that would permit innovation but exert just enough control to squeeze out financial failure. It is a nice idea; but it is a fantasy. The experience of the past year is an object lesson in the limited power of regulators.
The notion that the world can just regulate its way out of crises is thus an illusion. Rather, crisis is the price of innovation, so governments face a choice. They can embrace new financial ideas by keeping markets open. Regulation will be light, but there will be busts. The state will sometimes have to clear up and regulation must be about cure as well as prevention. Or governments can aim for safety and opt for dumbed-down financial systems that hobble their economies and deprive their people of the benefits of faster growth. And even then a crisis may strike.
Comment: As tempting as more regulation of the financial markets seems right now, we should not underestimate the market’s resiliency and ability to self-correct. As economist Arnold Kling reminds us, “Markets fail, let’s use markets.”
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Tags: Aim, Arnold Kling, Booms, Busts, Compromise, Crashes, Crises, Dilemma, Economist, Financial Failure, Financial Markets, Governments, Illusion, Limited Power, Notion, Prevention, Regulators, Resiliency, Risk Takers, Temptation
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