The people running financial institutions have taken the blame for the financial collapse. According to popular opinion those devious people exercised bad judgment, took too many risks, took advantage of innocent investors and borrowers, and committed a laundry list of other offenses. They got away with this underhanded behavior because congress had not created sufficient regulations to prevent it-at least so the story goes.
Now the Obama administration, Congress, and everyone else wants more regulation “so this sort of crisis will never happen again.”
More regulation, however, won’t solve the problem. Thinking that more regulation will eliminate financial crisis suffers from at least two major logical flaws.
First, people cannot design regulations that will cover all contingencies in a complex living system like financial markets. Too many variables already exist. To regulate all of them would require regulations so massive and complex it would choke the regulators themselves.
In addition, living systems learn. By that I mean, whatever regulations Congress creates, inventive minds will learn a way around them. Not because these people have malicious intents; simply because they want to find ways to make money.
Second, the financial markets did not crash because of lack of regulation. They crashed in response to the artificial boom precipitated by the expansion of the money supply. Expanding money caused the dollar prices in certain sectors of the economy-most notably housing and autos-to rise out of proportion to the supply of goods in those markets relative to demand. These falsely stimulated dollar price increases lead the producers of these products to simply make too much. Rising prices kept telling them-falsely-that they needed to make more. The result-a crash.
The only solution: eliminate the fractional reserve banking system.
Do that and financial problems will no longer sweep through the entire economy. And regulation will become superfluous.