Regulation vs. deregulation. Alas, it’s a false black/white, either/or choice. And a dangerous one.
Our current economic crisis is an example of what has occurred many times in past, given slavish adherence to deregulation dogma. In an almost religious quest for deregulation, we’ve suffered a repeat of the kind of impact we saw with the savings and loan crisis, derivatives debacle, junk bonds, etc. (yet with each occurrence, we’ve seen an increased magnitude of impact). In fact, the over-leverage by financial institutions in their investment in mortgages is reminiscent of the over-leverage by investors in the stock market of 1929.
Deregulation shouldn’t be a religious quest by believers in a free market. The New York Stock Exchange – a global exemplar of a free market – depends on a high degree of regulation to ensure its reliable, efficient operation.
Now, with the problems caused by decades of over-deregulation, we can expect government regulators to step in and close the barn door after they’ve let the horses out. I’m not arguing that we don’t need additional regulation. Re-regulation is needed to attempt to prevent similar bad things from recurring in the future. Such regulation may be appropriate, but trying to preventing unwanted outcomes is not the only approach that should be considered.
My first job was in management consulting within a public accounting firm. As a young associate, I was taught lessons in basic controls. Such controls are of two types: prevention controls and detection controls. Prevention controls keep bad things from happening (for example, preventing employees from stealing money from their company). Detection controls don’t directly keep bad things from happening, but detect bad things after they happen (finding out that an employee stole money from the company). Well, what good is that? In the theft example, if the company had something of the employee’s, it could claim restitution of the stolen funds – from the employee’s next paycheck or pension funds.
Given all the focus on and resistance to regulation, it appears that few lawmakers, government regulators, or bureaucrats know of these 2 types of controls. They focus solely on prevention controls. What’s wrong with that? Prevention controls are very expensive. And they’re often viewed to be oppressive. In fact, they are sometimes inappropriate, given the level of risk and the potential of detecting the problem and possibility of gaining restitution.
So let’s hope this time, policy makers, regulators, and bureaucrats consider such detection controls instead of relying solely on prevention controls. If they don’t, they’ll inevitably over-regulate, putting us into yet another round of ping-ponging to over-regulation begetting frustration then under-regulation again. And each time, it will cost us each more.