To regulate or not to regulate


Federal regulation and self-regulation
At least since Carter, American presidents have supported federal deregulation. The result? The Savings and Loans crisis. As a result of this, further deregulations were effected and we got the subprime crisis. Many banks made big profits, until they needed bailouts. With deregulation, the American economy was good, more or less. Until it collapsed.

No realistic alternative to bad banks
As an alternative to federal regulation, the bankers are touting market self-regulation. They say that when they are incentivized to perform for themselves, they are incentivized to perform for their customers; they say that if they don't perform for their customers, they won't make any profit for themselves. This is just not true.
Banks and bankers are two different things. As the subprime crisis demonstrates, the bankers can make a nice profit looting their own banks. They can become rich and super rich while their banks need federal bail-outs. Some of their customers can make a nice profit while their customers take the loss; the board of the pension funds can make a lot on fees, buying crap securities from banks and unloading them on their customers, the pensioners.
And in spite of the banks' lousy performances, their customers or the customers' customers can find no better alternatives. Because the assets are locked, because the customers don't know there are better alternatives, or because there are no better alternatives.

Regulation: Bad or not
Regulation can be a hindrance for efficient operation. In the Soviet Union, private unregulated plots were more than eight times as productive as common regulated land.
In Iceland, a small state on an island in the North Atlantic, fishing was unregulated. The fishermen were catching as much as they could, resulting in overfishing and little or no profit. To remedy this, fishing was regulated with annual limits. Each fishermen got a quota based on recent catch, a quota that could be sold. The result was that with time, the best fishermen acquired most of these quotas.
Without regulation, it was rational for the fisherman to loot, to catch as much as he could; restraint would only mean giving away the catch to others. With regulation, in 2000 Iceland went from being one of the poorest countries in Europe to being the richest.
The idea that some regulation could be good and some bad seems too complicated for some people to understand. Without regulation, the American bankers looted as much as they could. They looted house-owners, investors, often their own firms. When the banks were about to crash, they were saved with taxpayer money so they could continue with their looting. In Iceland, they could have used the American method. They could have used taxpayer money to build fish farms so the fishermen could continue their important work unregulated. I believe it was good for Iceland that they did not use the American method.

Some regulation necessary
Most free trade supporters agree that some regulation is necessary. Although Milton Friedman, free market guru, thinks individual freedom is the ultimate goal, he is for some regulations. Most people agree that freedom to kill must be regulated so Friedman accepts it. Business should stay within rules, without deception or fraud. But protection against fraud is interference with voluntary contract. He does not say how you are going to achieve no fraud if you have no protection against it. Well, he is not that dogmatic. He might accept some compromise. He might consider registration of taxicab drivers as they might be in particularly good position to steal from customers they pick up at night.
Friedman believes in voluntary and informed transactions. When a junkie buys his heroin from his pusher, it is a voluntary and informed act. Some regulation is needed, even for voluntary and informed transactions.
All laws are regulations and many regulations are laws. To Friedman, laws are regulations that he likes and regulations are laws that he does not like.

© Anders Floderus