[dorlomin]

Link to Economist article.

Regulation. Imposing limits on capital. Setting rules for compliance.

Suddenly from the ghetto it is has emerged as the solution of today. For decades there has been a growing chorus to tell us that any regulation of markets is a source of 'evil' and an impediment to the glory of the market correcting all ills. But now some people believe we are awekening to the scale of the problems of an unregulated market. In this article the Economist, the paragon of old school liberalism (sorry but the American abuse of the word 'liberal' makes my blood boil), is now trying to advocate a constraint against increased regulation.

To my mind the market is a pricing mechanism. It determines what price the supply and demand of a product or service has (amoung other uses). But it is not a panacea nor an all knowing entity. The market is not rational or omnipotant it is a reflection of the minds of those who participate in it and can often merely reflect there herd mentality.

A market can stay irrational longer than an investor can stay liquid.

Adam Smith is not the paragon of unregulated capital he is potrayed to be. In his mind, so far as I understand it, the market works but is limited. Every individual persues there own self interest but that collective persuite of self interest has to be regulated. His veiw of business men to paraphrase Rabbie Burns is a 'parcel o' rougues'.

The free market works best when it is regulated. When it enforces tranparency. When it prevents monopoly. When it counters short term collective agreements.
And transparency.

transparency

transparency.

No market can ever be rational without it. It takes good regulation to enforce transparency. A transparent socialist system will work better than an opaque capitalsist one.

Regulation on areas such as ensuring banks have enough capital to cover loans or insurance companies are pricing risk apropriately will encourage the confindence of inverstors into a market and smooth the flow of capital.

Riskier investments can attract capital by being required to meet minimal standards.

This is the benefit of good regulation. This current crash is unnecessary because there was insufficient regulation of the monoline insurers, the CDO market, the CDS market and the mortgage market.

In the long term America will suffer a loss of confidence and a consiquence of failure.


Rant over but I am angry at the idea that regulation is inherently a bad thing.

[Kaj]

Interesting read.

I would be a lot more amenable to capitalism, if, as you say, the state worked to break up monopoly.
Sadly, in most cases the state sector is used in quite the opposite way, to enforce monopoly. Powerful industrial interests are successfully pushed on the State

If you look at two key US industries, agribusiness and high technology, they are both heavily subsidized by the state. Meanwhile, third world countries are forced by various means to drop protection on their food exports. This is a major 'distortion' of the market, and the effect is to drive third world producers into poverty, while big agribusiness grows ever more powerful.

Similarly, the main point of NAFTA, a state-enforced treaty, was to ensure patenting rights for US pharmaceutical/technology companies. This is to keep the US technological industries in the lead, at the expense of the world's interests, since the advances of that product are not allowed to be distributed around the world.

The irony is that much of the company's research comes from the state sector too --universities and the like. The company usually just refines this research into a shiny toy and charges for it. They should not be allowed to own and patent knowledge for decades in order to stifle competition.

Free trade is a nice idea maybe, but it does not presently exist.

[Starvid]

Deconstructing the Economist on regulation: http://www.eurotrib.com/story/2008/4/6/123150/2671

$this->bbcode_second_pass_quote('', 'A')nd thus the conclusion: financiers are smarter than governments, thus they will inevitably find devious ways to crash the economy (after making loads of money in the process, of course, a just reward for their "creativity" and "innovation"), thus crises are inevitable. Apparently this applies even if you stunt the financial sector and tolerate to grow slowly (an assertion that is, of course, nowhere backed by facts, and even contradicted by earlier paragraphs of that very article). So one might as well have fast growth in-between, right? And, conveniently, governments should still be there in the bad times to pick up the pieces.

From the financiers, this makes sense:

* they gorge during the boom, and are celebrated for their smarts and innovation when what they are really doing is finding legal ways to loot and rape the rest of us;

* they are helped during the bust (sorry, the stumble), as that is a tolerable price to have bigger booms the rest of the time;

* they are right and deserve all of this because they are rich. That wealth has to mean something.

But for everybody else? Oh... they might be rich one day, so being stuffed in the meantime is an acceptable price, I suppose. Even if they are actually trampled upon after the 'stumble.'

[MrBill]

Sorry, dorlomin, but I have to humbly disagree with you. Markets bring buyers and sellers together as well as intermediate savers and investors with borrowers and lenders. They are more efficient than any army of central planners and the limited tools at their disposal.

I agree with transparency. I agree with having a level playing field. I disagree with privatizing profits, while socializing losses. However, what we are seeing is not free or fair markets at work, but some sort of bastardized child somewhere between capitalism* and socialism.

This current crisis has not been caused by an alphabet soup of financial derivatives - they were merely the fuse that set it off - but by America living for 35-years with ever increasing current account deficits - federal, state, municipal and personal - that have lead to global imbalances that are simply unstable and unsustainable.

It would not matter if America were on the gold-standard. That would mean those current account deficits would just be paid for by transfering physical gold to its creditors. Their capital structure is such that they rely on external funding for consumption. You are blaming markets for providing that funding when it is really public policy and private consumption that is creating that demand.

You cannot blame markets for a lack of regulation. They operate within the laws of a country, but they also operate in an absence of rules and regulations. They simply are. However, if the powers that be choose to regulate then they need to make damn sure that their policies are consistant with one another. Markets arbitrage between political fantasy and economic reality.

If a country chooses to debase its currency and squander its economic credibility please do not blame markets for pricing that uncertainty into their calculations.

However, where poor regulation prior to a financial crisis is undesirable, tightening regulation during a crisis can and will make matters worse. A common criticism of Basel II for example. It tightens capital adequacy constraints when liquidity is scarcest and needed the most. The best time to regulate is before a crisis. Credit risks should be shared between borrower and lender. It is wrong for regulators to try to push all the risk onto one or the other.

As imperfect as markets may be I trust implicitly that regulators and politicians can make a bad situation worse!

*I also hate the term capitalism because of all the ideological baggage it carries. By capitalism I mean a market economy. Nothing more.

Kaj, you may want to familarize yourself with the details of NAFTA before commenting on it. I would urge all Democratic presidential candidates to do the same! ; - )