Wednesday, September 17, 2008

Regulation Shmegulation

In light of the never-ending riptide of financial institutions that have collapsed in the last ~12 months, many people in high places are asking themselves what to do. Some are blaming the people of the United States. Some are leveling their criticism at the government regulators. Should we buy out the debt of these troubled institutions? Some Presidential candidates have done a nice switcheroo, claiming at first that, "We must not bail out the management and speculators who created this mess. They had months of warnings following the Bear Stearns debacle, and they failed to act," and then following up today with a gentle, "The government was forced to commit $85 billion...there are literally millions of people whose retirement, whose investment, whose insurance were at risk here." Uh-huh

But, no one seems to want to say that these sort of industries need more regulation. Sarah Palin says, "This crisis happened for several reasons... our regulatory system is out-dated and needs a complete overhaul... John McCain and I are going to put an end to the mismanagement and the abuses in Washington and on Wall Street... we're going to reform the way Wall Street does business... and we will get government out of the way of private sector progress." This is the text from one speech in Colorado. Now, are we going to reform the regulation processes, or get government out of business? Which is it Sarah?

This post is not to criticize the Republican candidates or to point out the inconsistencies in their responses. That's just a bonus feature of the writing today. This is to highlight the need for oversight in industries like this. Free-market capitalism gives private entities the ability and the freedom to conduct business in any way they see fit. This is one of capitalism's greatest strengths, it enables a large amount of production and innovation. But capitalism, as a pure economic concept, does not allow for many protections for other areas of the social network. Capitalism does not implicitly recognize the need for labor protection, environmental regulation, insurance, etc. Capitalism's job is to make money, which is does with great efficiency. It is the government's job to regulate capitalism to ensure that the people, the land, and the society upon which capitalism draws its resources is protected.

The breakdown of these financial markets is a good example of government not doing its job. Capitalism, in the guise of these lending houses and banking firms, developed a method through which they could lend money to less-than-ideal candidates. In order to lessen their own responsibility, they created a market to buy, sell, and trade this mortgage debt with other firms. And when the loans started coming back as default, they all realize that none of them had the money to cope with the fall-out. The government's responsibility is to ensure this stability, to keep these sort of dubious markets from materializing in the first place. The government failed in its job here, and now there is a major shakedown of the entire financial world due to the huge debt loads which are now coming due. The answer to this is not to "get
government out of the way of private sector progress," but to reasonably and rationally utilize the government's powers of oversight to maintain an equitable and prosperous economy and society. This is the key step that some candidates are missing.