Friday, April 16, 2010

Regulatory Reform Support Shows Misunderstanding Across the Board

Politico reported yesterday:

The Republican rhetoric sounded tough on financial regulatory reform early this week...

...But behind such tough talk is a realization within Republican ranks that several of their own may find themselves voting with Obama when the final Wall Street reform deal comes together.
Of course, this sort of behavior is nothing new. In it we see more evidence of talk lacking action in Washington, and we see that principle has little place in the actions of many in government. When pressed on the issue I would venture that many of those who support the financial regulatory reform package would claim to support free market economics. Their support for such a measure, however, points in the opposite direction.

More than just lacking principle, anyone supporting the proposed legislation must also lack sound economic understanding. Simply put, the regulatory reform bill is indicative of the incorrect diagnosis going around as to what cause the recent financial collapse.
William L. Anderson correctly notes:
The meltdown did not occur for lack of regulation, but because of moral hazard. When the government agreed both tacitly and openly to backstop Wall Street losses, and when huge pyramids of "investments" were piled on mortgage securities (also tacitly backed by the government) that turned bad, a meltdown was inevitable.
The meltdown did not occur in a "free market orgy." Indeed, the market exposed the foolishness on Wall Street, which long ago had jumped into bed with the politicians.(Wall Street has been a major campaign contributor, and politicians don't want to lose their cash cow.) Furthermore, the bailouts have not prevented us from going into a depression; they only have prolonged the financial agony.
Dr. Anderson is dead on. An incorrect storyline is going around regarding to the cause of the economic collapse. The free market was not to blame for our crisis, contrary to the cries of statists and economic fools. Rather, the free market was not even able to operate! Instead, the government's involvement in the market drove malinvestment and created moral hazard. This resulted in economic ruin, just as the Austrian free market folks predicted years in advance.

In addition to the failed reasoning behind the bill, it is also bad policy (here's why)--plain and simple. Folks on the left and right both fear that the bill will harm upstart businesses, and others are concerned about the impact it will have on the greater world of business, investing, and on our economic system itself. Still others feel that more government influence is not the solution. Indeed, it was the government that brought about our problems in the first place.

The Republican senators looking to jump on-board the Obama Administration regulatory reform wagon, should do their homework before they support poor policy based on bad information. And if they do support such a measure, they should never claim support for the free market system again. Instead, they will forever show their statist colors.

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