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Self-interest is not self-regulation 17 Jan 2008

Posted by Watts in Uncategorized.
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1 comment so far

From the comments thread at Balloon Juice on the ongoing housing market collapse, caused by the sub-prime collapse, which was caused in no small part by banks giving loans to people they knew were risky investments and then turning around and selling options and derivatives on those risky loans—thus ensuring that a default on those loans would cause a cascading effect throughout the financial market:

AkaDad: If we want to stop this from happening again, we need to provide less oversight through deregulation.

Dennis: And make the Bush tax cuts permanent.

AkaDad: Exactly. That way we have less money to provide the oversight. It’s really just common sense.

Dennis: Oversight of the financial markets is just a holdover from the days of that Depression-prolonging FDR. It’s obvious from recent events that the titans of finances are so clever that they require not oversight but freedom from all government fetters.

The whole thread’s worth reading for real explanations of what derivatives are and what leads to this, but I found this exchange particularly amusing due to how often we’ve heard arguments that are pretty much like this.

This does lead to a dispiriting cynicism, though, doesn’t it? Free market libertarians argue that government regulation interferes with market efficiency, and that if you simply trust producers to act in their own self-interest, any given market will work better. Keynesian-leaning liberals argue that businesses will frequently take actions that harm not only their own long-term interests but everyone else’s long-term interests, and that it’s better to have an inefficient but steady market than one that runs itself off the rails every so often.

I’d really rather believe the libertarian view, because it really is arrogant to say, “We don’t trust you not to screw up massively without oversight.” But when it comes to most businesses, I don’t trust them not to screw up massively without oversight. The track record of regulatory agencies hasn’t been much better, but I’ve seen little historical evidence that makes me believe that no market regulation is better than haphazard and inconsistent market regulation—and nothing that convinces me that consistent regulation wouldn’t be better still.