Part of me as a suspicion that certain forms of increased regulation to our free market economy may be effective (such as transparency regulations, otherwise known as “measurement”) if their associated costs can be minimized (e.g., through improved information technology infrastructure). I also suspect however that even this can have a limit as we eliminate the measurement problems we may find ourselves face-to-face with the uncertainties of genetically constrained human psychology.

Perhaps the next advance will have to await wide spread genetic reprogramming of the human species.

Being someone with a physics and engineering background, I very well appreciate the constructive role non-linear dynamics can have in complex systems. Like with the human body, I like the idea that the body should be left to itself and it will function well most of the time. However, as technology improves we humans have found it useful to measure, intervene or downright replace parts of broken anatomies with something artificial–our solutions tend not to be perfect, and can leave us wanting for the original body once again. That equation however changes as technology improves. What will happen when artificial eyes are developed that are demonstrably better than what nature has ever provided, and impose a relatively low cost of adoption and maintenance? What about better, stronger and faster limbs? I remember as a child thinking, “Yeah, it would be cool to be Jamie Sommers–the Bionic Woman!”

As information technologies improve and the cost of their adoption and maintenance decreases, I am all for inserting certain types of artificiality into our economic system such as improved measuring systems (were the cost of Sarbanes-Oxley lower!), damage control systems and prevention systems if the efficacy/cost equation be optimized.

So, who is for complete non-intervention of your personal health?

I bounced here off Hit 'n Run. It impresses me that the Weisberg column has inspired a small flood of excellent libertarian short-form essays, yours included.

It would be of value to have columns like Weisberg's come out on a regular basis, to hone the cadres' skills and build the literature. It would be worth paying for this. Lucky for us, there are no shortage of volunteers providing targets.

And, your rabid dog analogy was golden!

Keep up the good fight!

This does not address the desirability of a regulatory environment except in the sense that the knowledge to create proper balance can be lacking, giving rise to the constant need for further “adjustment”.

A politically/centrally regulated economy is not stable. The feedback loop has to much delay and distortion.

It is known that regulatory reform of the mortgage GSEs was proposed and opposed and defeated. Was Barney Frank just ignorant of the potential problems?

Or was he part of the bargain made to allow lenders to find a way to make money off of bad loans to fulfill policy goals?

The fact of the crisis occurring in a regime of extensive regulation tells us that having a regulatory system is no guarantee of effectiveness and further, can manage to coordinate problems into a crisis of GSE proportions.

Proponents of regulated economies like to cite some ideal state where the regulatory regime works in harmony with the market producing optimal results, even after failure after failure. Recall that a large justification for the creation of the FED was to prevent big depressions. The FED was established in 1913, sixteen years before the market crash of 1929.

It seems obvious in citing the mistakes of the FED board and other interventions of government at the time that they did not know what they were doing and thus did not comprehend the nature of markets.

Seventy-nine years later, they still don't.

They're all Keynesians now.

The moral hazard now comes into play when the government bails out these institutions. Even having a concept of “too big to fail” is a moral hazard, as that encourages this type of behavior with the thought always in the back of their minds that if it goes south, they will get bailed out anyway. In a real libertarian world, people would be held accountable for their risks, and therefore people would be more cautious when taking risks, or not take them at all.

Now the next step is to show that the regulations would actually be beneficial and enforceable. I don't think the complicatedness regulation is enforceable since it requires a measure of complicatedness. Regulation 2 I agree with but I don't think it would have prevented this crisis. Regulation 3 also would not prevent anything because it penalizes after the fact. There is also the possibility that all these regulations could make things much worse.

Naming regulations is the first step. The next step is to give real world or theoretical evidence of the effectiveness of the proposed regulation.

Interestingly you avoided any regulations that would limit the defaults and riskiness of mortgage backed securities. Like for instance allowing prepayment penalties, forbidding ninja and zero LTV loans, allowing recourse mortgages (no more jingle mail). There is real world evidence of the effectiveness of these types of regulations, namely Canadian banks.

- Limits on the percentage of mortgages a bank can securitize, or a requirement that a bank must own (must not sell along) some percentage of the assets it securitizes.
Similar requirements for mortgage lenders. They must not be allowed to pass along all risk. They have to be incentivized to limit risky loans.
- Limits on the complicatedness of derivatives (e.g. disallowing CDO's-squared)
- An exchange for derivatives that clarifies the exposure of individual players and the market as a whole.
- Credit rating reform: regulations to ensure that rating agencies have incentives to properly assess risk of securities. One intriguing idea is to mandate that pay to ratings agencies is in some way conditional on the accuracy of the assessment.

There are probably many other possibilities. I'm sure there will be a vigorous debate over the next few years.

Your a moron who was born from a frog. Why should we trust someone born from a frog. Obviously your frog nature was both necessary and sufficient to cause this mess. You bastard.

I think the argument above has about the same amount of content as your argument. Which is to say it has no content.

And it occurred within a regime that implements a body of regulation. So libertarian, zero-regulation doctrine simply isn't apt. The extant regulation is a political reality. The rational policy question, then, is what action to take at the margin. And it doesn't appear that salutary policy action would have required anything like God-like omniscience; indeed, the argument is that rational and economically beneficial action probably would have been taken had it not been for the conviction that regulation should generally be avoided.

So, to bring it back to your analogy, what the Canitarians are saying is that the vets should lay off the dogs because

(a) they are drunk and Parkinsonian and likely to botch the vaccinations
(b) even more, *they are the principal carriers of rabies in the world*.

Clearly now – the email & IMs have been released – a significant part of this is plain fraud on the part of the rating agencies. When they went public, they went from neutral, independent bodies to “service companies,” being paid by instrument sellers for ratings. Thus management allegedly forced employees to positively rate instruments despite the real risk, and to neglect to fix known errors in the ratings model.

Complete change of business model, and one that compromised the entire system. If you want to ask where new regulation should be, it should start there: to assure the independence and neutrality of ratings.

Calling each other “morons” and the like is just counterproductive. There was real crime here. The financial system is grown-up stuff for the real world, not simply signaling one's political allegiances. Please set aside your political biases and examine the facts as they are coming to light. Otherwise this discussion is pointless.