The Need for Regulation

Those who supported deregulation of the financial markets in the past (though perhaps not so enthusiastically now) seemed to have two assumptions underlying their position:

1) People (even financial types) are good, and will do the right thing even if there are no regulations requiring them to -- so we can trust them. (This assumption never seemed to get expressed in words, and when it is expressed it certainly becomes harder to maintain.)

Or

2) The market will make corrections. If there is fraud, it will be eventually found out, and those who cheat will be put out of business by the normal operation of market forces. If any stock or commodity becomes ridiculously overpriced, the market will figure this out and the market will adjust -- without any need for regulators to intervene. (This argument has been expressed, most notably by Alan Greenspan.)

I’d suggest a different way of looking at the market.

I believe that people are basically good -- but subject to temptation. Good people can do bad things. Good people, left unsupervised and unregulated, will all too often succumb to the temptation to make a huge profit at someone else’s expense. So a market without regulation is like a city without door-locks or policemen. Even if most participants (citizens, investors) want to be fair and decent, a few won’t, and they can corrupt the whole system. And before long we have a feeding frenzy.

Will the market make corrections, without any need for regulation? Very likely -- but only over a considerable period of time, by which time many innocent people will be hurt -- their jobs and their savings wiped out. Witness the most recent Wall Street disaster.

So let’s acknowledge these realities, and let’s state them this way:

The purpose of business (whether a restaurant, or a clothing store, or an auto manufacturer, or a bank) is to make money. For many participants, that will mean making money by any means possible. To expect otherwise is to expect sharks and wolves not to act like sharks and wolves.

The purpose, therefore, of government, is to restrain the natural shark-like tendencies of business -- to set up and maintain the rules under which business will be allowed to make money. It is the role of government to protect the customer, the consumer--

-- by requiring honesty -- truth in labelling, truth in lending, contracts that are understandable, products that are as advertised

and

-- by establishing and enforcing standards -- food must be free of harmful chemicals, products must be safe, interest rates must be reasonable.