Fiasco Economics

Every time a financial fiasco hits, politicians readily expand regulations. But what’s the point of adding to the regulatory barrage if it’s all just for show?

They studiously avoid asking the right questions:

1. What previous regulations caused (or helped cause) the fiasco?
2. What previous regulations that could have prevented the fiasco weren’t enforced?

Economist Gerald O’Driscoll, Jr., writing in the Wall Street Journal, adds a few notes of caution to the current regulation madness. Most regulatory bodies get “captured” by the businesses they regulate. A huge amount of research shows how supposedly anti-​business regulations serve the interests of some businesses at the expense of their competitors. 

It’s the crony capitalist equivalent to politicians making it harder for challengers using “campaign finance” regulations. Same game, different venue.

O’Driscoll also explains which regulations weren’t enforced prior to the recent meltdown — those against fraud. This form of regulation is not like the regs politicians usually propose. It’s basic rule of law, the government’s first responsibility. 

And regarding Lehman Brothers, Goldman Sachs, and Bernie Madoff, government failed. 

O’Driscoll argues that multiplying rules and regulations is not merely the wrong response, but a sorry repeat of the last century’s “great intellectual failure.” Pity, then, to see the current administration push just that. 

Following this path will just lead to the same old recycling of the boom and bust cycle. Freedom and responsibility — where criminal fraud is actually fought by government, not encouraged — work better. 

This is Common Sense. I’m Paul Jacob.