of future results. That’s the essential message of John Tamny’s recent post which ends with these remarks about Federal Reserve Chairman Ben Bernanke:
What commentators should not do is use Bernanke’s now-naïve utterances against him. He was wrong about looming problems in the mortgage markets, but so were many market participants – by definition. And then what commentators should do is use the information gleaned from the Fed transcripts to rail against any and all banking regulations which, by their hubristic presumption not to mention simple logic, are doomed to fail.
However, the real meat of the post is about how limited a tool regulation is:
To state the obvious, regulators, and this includes the allegedly brilliant academic minds at the Fed, will always be late to problems, thus rendering regulation worthless at best, and tragic at worst for regulations creating a false sense of security that inevitably magnifies in harmful ways the similarly inevitable errors that occur in a marketplace comprised by fallible individuals. Better is it always to limit regulation to something that doesn’t even require effort by lawmakers; as in if you fail, you will be allowed to go bankrupt.
But what happens if you simply can’t allow a company, whether it’s an auto maker or a bank, to go bankrupt? I’ve already expressed my opinion on the subject, probably too often: don’t let them get that big in the first place and split ’em up when they do. I don’t believe that there’s a multi-billion dollar company in existence that didn’t grow to its present size through some form for rent-seeking, whether it’s a direct subsidy, government contracts, or the protections for competition that intellectual property law provides.
Failing that I’d cap the compensation for any company that requires a bailout from the government at the level of a GS-14. GS-14s are mostly supervisors and managers. Here in Chicago they earn between $110,000 and $140,000. The next level, the appointee level, earns between $140,000 and $200,000. That would take the starch out of their sails.
The key point here is that regulation is inherently retrospective. It deals with things as they were or as they have been. It is unable to respond to the counter-moves of intelligent actors by its very nature.
That’s why I prefer more organic approaches to controlling behavior, whether we’re talking about the behavior of individuals or corporations. Such approaches include removing subsidies, protections from competition, and backstops.