Sunday, October 5, 2008

“Economist” on the crisis and regulation

Vortex of regulation

This article in the Economist seems to agree with both the contents and the imagery of the earlier post — regulationist vortex of business nationalization is wrecking the economy. The best thing to do is allow the laws of finance restore the market.
A longer-term worry is the inevitable urge to regulate modern finance into submission. Though understandable, that desire is wrong and dangerous — and the colossal success of commerce in the emerging world [...]. Finance is the brain of the economy. For all its excesses, it allocates resources to where they are productive better than any central planner ever could.

Regulation is necessary, and much must now be done to improve the laws of finance. But it must be the right regulation: an end to America’s fragmented system of oversight; more transparency; capital requirements that lean against booms and flex with busts; supervision of giants, like AIG, that are too big and too interconnected to fail; accounting that values risks better and that everyone accepts; clearing houses and exchanges to make derivatives safer and less opaque.

All that would count as progress. But naive faith in regulators’ powers creates ruinous false security. Financiers know more than regulators and their voices carry more weight in a boom. Banks can exploit the regulations’ inevitable blind spots: assets hidden off their balance sheets, or insurance (such as that provided by AIG) which enables them to profit by sliding out of the capital requirements the regulators set. It is no accident that both schemes were at the heart of the crisis.

A later article, however, seems to argue otherwise and supports the bailout.
Intervention may help taxpayers, because they are also employees and consumers.
Thanks for deciding for me what’s going to help me. This one goes even further. Arguing that credit unavailability is bad (compare with this opinion, stating that the economy is not yet ready for loose credit — it needs to wind down and stabilize before credit becomes more available), the article proposes not just national, but international socialism:
Governments need not just to communicate, but also to co-ordinate.
Why don’t we cut through the b.s. and call it the Third (Fourth?) International already? “Regulationists of the world unite!”

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