Why I Support Some Regulation

David Friedman also gives a good description of why I support a certain amount of regulation:

"Friday, September 26, 2008

Regulation: Too Much or Too Little

One comment frequently made about the present financial mess is that it is the fault of deregulation. As I argued recently, it ought rather to be seen as the fault of regulation—more precisely, of government interventions in the housing market designed to make it possible for more people to borrow money in order to buy houses.

There is, however, a germ of truth to the claim. While I am not an expert, I gather that one source of the present difficulties was a loosening of the requirements imposed on Fanny Mae for loans during the Clinton administration. That made it possible to offer loans to less well qualified borrowers than before, a policy which increased the amount of business Fanny Mae did, satisfied political demands to expand home ownership, and helped lead to the present mess.

This raises a general point worth making. The ideal arrangement in my view, for housing and many other things, would be an entirely free market with the government playing no role. But once the government does intervene, less regulation is not necessarily better than more. If, as in the current case and the earlier S&L case, government intervention makes the government ultimately liable for losses by the regulated firms, less regulation may mean more opportunities for firms to gamble on the basis of "heads we win, tails you lose," with "you" being the taxpayers. Once the government is liable for losses, it may be prudent for the government to make rules designed to limit risk."

I agree with Friedman completely. Once the government does intervene, more regulation can make, and often does make, more sense. Friedman is, however, more free market than I am, because I believe that our government will always, eventually, intervene in financial crises like the current one. Hence our disagreement on the need for regulation.