Thursday, August 12, 2010

Context Matters

The pipe dream that less regulation is better and that market pressures will make everyone behave has been the most damaging thing to the country in the past 30 years.

You have to ask yourself, if the market is so effective at self regulating, why did regulations ever get instituted in the first place? The context matters.

I'm happy to remove regulation whenever possible. But you have to prove to me that the problems that caused the implementation of the regulation in the first place somehow have another factor keeping them from happening yet again.

Here's one example - the smog deaths in 1948 in PA. Market pressure didn't have any impact on this company to keep it from polluting.

For Financial, think of the Savings and Loan crisis in the 80s and 90s.

A related recent example is Rand Paul and the idea that the market would pressure private businesses not to discriminate. If that were true, why didn't that come to fruition in the 100 year after the abolition of slavery? Business owners are not logical profit optimizing machines. Just like everyone else they're flawed human beings that will do things that don't make sense and can hurt the community or in this case a subset of the community.

BP's catastrophe in the gulf is another example. Often when short cuts are allowed and can increase profit (even as they increase risk) they're taken. And with a legal cap on damages, what the heck! That even sweetens the deal towards risky behavior.

Because the people who run these institutions are human and some are unethical (and there will always be some who are unethical) the only way to protect against it is with sensible regulation.

There are many, many more such examples, and believe me, I understand there are some regulations that overreach (note the use of sensible above!). But you should never just remove them without considering the original context and the goal otherwise it's just history repeating...