Monday, July 21, 2008

More Market, Less Regulation

On page two of today's WSJ, Jon Hilsenrath wrote and interesting article entitled Markets Police Themselves Poorly, But Regulation Has Its Flaws.
The events of the past few weeks leave U.S. policy makers at a crossroads in a long-running debate about how to police financial markets.

For much of the past quarter-century, policy has tilted away from strict regulation and toward relying on market discipline to keep the financial system on an even keel. Market players, the thinking went, had an incentive not to push themselves or their counterparties too far, because they had too much to lose if they did.

This approach has failed, but finding a workable alternative won't be easy.
There have been a number of global banking crises over the past century, more frequent in the last three decades. Technology, advancement in communications, globalization and the integration of the national economies of nations play big roles in this mix.

Over the long term, markets self-correct. The quarterly, weekly even daily performances of businesses and their markets seem to trump long-range plans. In fact, long range plans are almost non-existence for public traded companies. The problem is no one is willing to demonstrate patience.

Think about the dot com era: the hype did not make sense given the business potential of all those very useless business ideas. In the latest mortgage crisis, we have seen businesses and individuals making poor investment decisions, banking on a bull-only housing market.

In the short-term, bad decisions are painful. In the long-term, they tend to correct themselves. Government officials will almost invariably make wrong decisions. That's not to say they don't know what they are doing -- there are some very smart people in key policy decisions; e.g., Federal Reserve Chair Bernanke and Treasury Secretary Paulson.

In the private sector, there are plenty of fall-guys. In the public sector, it is not as easy to replace key managers. Mismanagement in the private sector results in firings, lawsuits and prison terms; this is rare in the government.

There's no doubt that new regulation could do much to control markets, but any attempts to eliminate all risk should be shunned. Too much regulation tends to discourage innovation; it creates excessive bureaucracy and unnecessary compliance expenses. It continues to be unacceptable for the taxpayers to bail out poor business decisions, be they from the business community or the government.

The trends are discouraging when we see the level of governmental bail-out increasing in volume and raw dollar amounts.

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