When regulation fails

“It is easy to assert that the solution to any market failure is better regulation. If regulators were all-knowing and all-powerful; if they were wiser than the chief executives but willing to do the job for a fraction of the remuneration awarded to such executives; if they understood what was happening in the dealing rooms of Citigroup, Merrill or Lehman better than Chuck Prince, Stan O'Neal, or Dick Fuld; then banking regulation could protect us against financial instability.

But such a world does not exist. Market economies outperform planned economies not because business people are smarter than civil servants – sometimes they are, sometimes not. But no one has enough information or foresight to understand the changing environment, so the market's messy processes of experiment and correction yield better results than a regulator's analysis.”

John Kay, "Taxpayers will fund another run on the casino", Financial Times (17 September 2008).

[LW: Wise words from the incredibly wise John Kay.]

John Kay is a financial columnist for the Financial Times of London.

I agree with Kay that recommending more regulation is not wise. The financial services sector in the U.S. is one of the most heavily regulated and it has done nothing to limit our exposure to a crash. Frankly, I don’t even understand how increased regulation might be implemented. What do the people proposing more regulation expect the regulators to do. Stand directly behind bankers and approve or not approve every decision they make?

I think we have had too much regulation and not enough accountability and not enough suffering on the part of those who should suffer when a business fails: The shareholders. Allowing bankers to be bankers, holding people to high standards and being able to hire and fire to ensure they perform in accordance with the firm’s principles and priorities, and providing shareholders with an incentive to take an active interest in the fate of the investment they have made would, in my mind, be far more effective in avoiding future problems.