Regulation Myths

by Pejman Yousefzadeh on October 9, 2010

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The following passage–found in this Will Wilkinson post–does a very good job at blowing up myths concerning the supposed diminishment of financial regulations beginning in the 1980s. Would that more people pay attention to this, and other such efforts to set the story straight:

This is tediously common trope in left-leaning circles. But it’s just wrong. As economists Peter Boettke and Steven Horwitz have pointed out in a lucid short paper on the causes of the “Great Recession”, between 1980 and 2009, four new regulatory policies were imposed on the financial sector for each regulatory policy lifted. It’s simply inaccurate to describe this period as an era of deregulation. It was, on the whole, a period of decidedly increasing regulation. In any case, toting up regulations is a bit of a mug’s game. The relevant question is rarely how much regulation there is, but how a particular regulatory scheme facilitates or impedes productive exchange, stabilises or destabilises markets, by shaping the incentives facing firms. More regulation doesn’t help if they’re the wrong regulations. (Compare: more drugs won’t help a sick man if they’re the wrong drugs.) Indeed, the proliferation of new regulatory rules increases the chance of unforeseen, harmful interaction between regulations. In addition to reducing red tape, deregulation can make markets easier to supervise. . . .

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