3 reasons the financial regulation bill solves nothing

Posted on July 4, 2010


Actually, all we need to know is Reason TV’s second point, which is that the new bill codifies a permanent “too big to fail” policy for the US. Nick Gillespie argues correctly that the biggest players took so many risks because they had a pretty good idea that Uncle Sam would keep them from collapsing if their risk-taking went sour. Now that they know that for certain, do we expect them to take less risk, or more risk?  “Too big to fail” makes every American taxpayer an unwitting investor in big institutions with no effective voice in how they’re run — the worst of all worlds:

2. Never Too Big To Fail

They replace “Too Big to Fail” with… “Too Big to Fail.” One of the reasons why major financial institutions played Russian Roulette with the economy was because they were betting they would get bailed out. Which is precisely what happened. The new rules codify the idea that the government will make sure certain institutions can never fail. And if you think the big boys won’t game that system, then you don’t understand how well Citigroup, Goldman Sachs, et al have come through the current meltdown.

Besides, to Nick’s third point, the government itself is the prime culprit in the subprime meltdown.  We need a reform of Wall Street less than we need a reform of Capitol Hill.  Government needs to quit manipulating capital markets in order to conduct social engineering in order to avoid the perverse outcomes we’ve seen over the last few years — a huge and irrational housing bubble and the government-prompted securitization of it into junk bonds.  Congress might want to exercise a little humility and pass regulations that keep it from doing it again in the future.

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