"It's deregulation's fault!"
That's the conventional explanation for the economic mess.
Barack Obama said, "This is a final verdict on the failed economic policies of the last eight years ... that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us."
Is deregulation is the culprit? It can't be. There was no relevant deregulation in the last 25 years. Meanwhile, highly regulated institutions eagerly bought risky government-guaranteed mortgages, stimulating excessive housing construction and an unsustainable price bubble.
Deregulation wasn't the problem, and reregulation isn't the solution.
It's intuitive to assume that regulation prevents problems, but it's rarely true. First, how would regulators know what to do? Leaving aside the bias they might have and the brutal fact that regulation is physical force, how can a small group of people understand the workings of a market sufficiently to regulate sensibly? Markets, especially financial markets, are far more complicated than any mind can grasp. They consist of many millions of participants making countless decisions on the basis of unarticulated know-how and intuition. To attempt to regulate such activity requires knowledge no one can possess.
To seriously regulate those markets you'd have to impose the "precautionary principle," a favorite idea of some environmentalists, especially in Europe. The principle prohibits any product or activity not proven 100 percent safe. It sounds so reasonable. But Ron Bailey of "Reason" points out what it really means: Don't do anything for the first time.
Bad idea. The world needs innovators and inventors. We need people who try things for the first time.
Nobel Laureate F.A. Hayek emphasized that government planners suffer from a "knowledge problem" because "the knowledge of the circumstances of which [they] must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess."
In other words, the planner or regulator can't possibly know what the multitude in a market "knows." So what regulators really do is straitjacket market participants, preventing innovators from creating prosperity for us all.
Another "Austrian school" economist, Israel Kirzner, applied Hayek's insights to typical regulation, showing how it must interfere with the market's discovery process, the profit-and-loss system that uncovers information vital to making consumers better off: