As the national media floods the airwaves with talk of placing new regulations on the financial sector, it’s worth thinking about what regulation is, how much regulation invades our lives, and what principles should be applied to regulation in general.
Regulation is government manipulation of the market for the purpose of achieving a certain set of goals. Since the market is a decentralized, interconnected, natural force much like the weather and regulation is an imperfect, man-made structure meant to channel that force, you can imagine how difficult it is to create effective regulation. Indeed, the history of mankind is rife with disastrous regulations that, when applied, have unintended consequences that often produce precisely the result they tried to prevent.
One of the most famous examples of these unintended consequences, also known as ‘blow back,’ comes from the Bible’s book of Exodus. Pharaoh heard that a nice Jewish boy was going to screw things up so he made a regulation: all male Israelite babies were to be thrown into the Nile. Of course, it was his action that inspired one Jewish mother to place her baby in a basket and float it down the river. That baby grew up to be Moses and he screwed up everything for Pharaoh. We might all be speaking Egyptian right now if the Pharaoh hadn’t created that ill conceived regulation. On the other end of the holy text spectrum is the Tao, which is literally 80+ case studies in blow back. The Tao states, basically, that if you act you’ll create unintended consequences and screw screw up the balance of things. This was today’s Daily Tao quote:
“When they lose their sense of awe,
people turn to religion.
When they no longer trust themselves,
they begin to depend upon authority.
Therefore the Master steps back
so that people won’t be confused.
He teaches without a teaching,
so that people will have nothing to learn.”
The Master doesn’t step in with regulation when people lose their sense of awe or no longer trust themselves, he steps back. Why? Because he knows that constructed actions (like regulation) create complexity and blow back. Complexity is bad simply because it separates us from the natural world and fosters inequality.
This election cycles most recent and unexpected celebrity was Joe the Plumber. Recently it was revealed that Joe is not a licensed plumber. To many, that fact is the last in a string of populist falsehoods about McCain’s everyman American narrative, but, to me, it was a reminder of how deeply our economy is regulated by government forces. To be a licensed plumber in the state of Indiana (Go Hoosers!) requires:
- four years in an approved apprenticeship program
- four years (6,400 hours) plumbing work experience
- four years plumbing work under the direction of a licensed plumbing contractor
On top of all that, you’ve also got to fork over a few hundred dollars to the government so they can administer a test to officially ‘license’ you. No wonder Joe is aggravated at the government: he needs to spend 12 years plumbing (how long is medical school?) before he can get a license from them.
Plumbing is just one of the hundreds of jobs local, state and federal governments have decided they need to regulate. This certification process does two things: it allows the government to regulate how people earn a living and it creates a higher barrier of entry so older plumbers can take advantage of younger, uncertified ones. Of course, regulation benefits the regulatory class as well as the government and those who have already been ‘certified.’ Lawyers, accountants and bureaucrats all ‘help’ people navigate the world of government regulation. They benefit from the government regulations that hinder the economic freedom of the people. More regulation means more lawyers and higher transaction costs. No government means no lawyers. In the grand scheme of things, I think this country has ventured way too far into the more regulation, more lawyers part of the spectrum.
Regulation is essential, but we must remember regulations are like buildings: you need to build a strong foundation built on principles (like gravity) or else the thing simply won’t stand. Right now we have thousands and thousands of regulations, we have massive government systems like Fannie, Freddie and the Federal Reserve. We spend billions on social programs that act as regulations and billions more on enforcement of said regulations. We’re regulated up the wazoo and the new regulations they want to push are simply building on the foundations (and maybe the top) of huge regulatory institutions and arms.
If the federal government is serious about cleaning up the financial sector, they need to start their regulations at the ground level. That might mean making all financial derivatives illegal. It might mean making over-the-counter degree derivatives illegal, but it MUST mean making a principled stand against a practice. The regulations must destroy the root of the problem or more will grow in its place. I seriously doubt they have the balls to do the job properly since everyone is talking about a bail out and no one is talking about posting bail.