[ExI] Greenspan: rhetoric vs. reality

[Dan]

--- On Fri, 5/22/09, Lee Corbin <lcorbin at rawbw.com> wrote:
> BillK wrote:
>> Thanks for describing in detail the wild excesses that
>> lack of regulatory enforcement led to in the financial
>> industry.
> 
> Well, I think that what Dan wrote supports the
> more general contention that when government
> first begins creating artificial incentives
> in the economy, and introduces other distortions,
> yes, the government must patch up the unintended
> consequences (often moral hazards) with patchwork
> regulation, which then often requires further
> regulation, and so on. So it's no surprise that
> deregulation of some of these patches are very
> dangerous.

Yes, though I hardly think the biggest problem this time around was deregulating a piece of the financial industry -- while leave the rest of the regulatory framework and government incentives (subsidies) in place.  Rather, new regulations WERE enacted (e.g., Sarbannes-Oxley, which was not a tiny little bit of regulation, and the CRA) many new subsidies were also put into place (e.g., the airline bailouts) plus the Greenspan put and the tendency to bail out big players was still there (and continues now under Bernanke and Obama; in fact, it's expanded wildly with the auto bailouts).

Also, the problem with regulations are myriad, but they all come down to the faith that the government can foresee the financial future -- including predicting how some might do entrepreneurship around regulations.  These are, of course, unintended consequences* of regulation -- and unavoidable to boot.  Now if government were able to foresee the future -- or at least do so as well as or better than markets -- then comprehensive economic planning of the fascist or state socialist kind would work and work well.  Empirically, we don't see this.  (And, to be sure, the current American model is along fascist lines: high economic regulation in the "national interest"** with nominal ownership of assets.)

Regards,

Dan

*  Unless it's the case that legislators and regulators are acting in concert with some entrepreneurs -- which, I think does happen.  Examples include regulatory capture -- i.e., where the regulatred industry or its big players "capture" the regulatory agency.  This happens in many government agencies where the standard career path is work for the government for a number of years, retire, and then go into business as a private consultant for the industry you formerly regulated.  Naturally, this creates a conflict of interest -- even assuming regulation could work.

Even then, there'd still be unintended consequences, as regulators and entrepreneurs of regulation (viz., entrepreneurs able to use regulations to their advantage -- which means, against everyone else's advantage) can't totally foresee all the consequences and there are perverse incentives, including the incentives for victims to organize (e.g., think of how there's a whole tax "avoision" industry in many countries).

**  Which is a meaningless bit of rhetoric.  There is no objective or scientific way to determine a nation's interest.  All such determinations are always someone's or some group's pretending -- wittingly or not -- that her or its subjective preferences should trump everyone else's.  And certainly it can be argued that the ruling elite is a parasite on a nation so it'd be the least likely to correctly determine such an interest.  (Certainly, one might nod to a thinker like Gaetano Mosca -- that maybe we're stuck with ruling elites and the best that could be done is to limit them as much as possible, but this doesn't change the fact that such ruling elites are highly unlikely to know much less pursue any nation's interest.  See also Roderick Long's "Can We Escape the Ruling Class?" at:

http://libertariannation.org/a/f21l2.html

)