Financial Crisis

We Always Need More Regulations

As Ajay Shah points out, we don’t just regulate our financial system, we micro-manage it. When things are going well in the US, and we make the case for deregulation, we get the answer: “See, even in the US, we don’t have a completely free market system. Even they have regulations. How can you propose that we junk ours?”

When things go wrong in the US, we get the answer: “See what happened to the US because they followed a free market system? How can you propose that we junk our regulations? We need more.”

This bias ensures that we will always follow suit when the US moves left, never when it moves to the right.

The Hackneyed Man From the Past

Gaurav non-Sabnis thinks that  the use of the man-from-the-past technique in my Pragati editorial “The Case for Freedom” was hackneyed.  He is free to think so. He also thinks that my introduction was inaccurate. He is free to think so too as long as he doesn’t mind being mistaken.

Gaurav makes two errors – a misinterpretation and a factual error. The misinterpretation is this: He says that “mismatch between supply and demand must be as old as beginning of trade”. Well, duh. Obviously, a famine is a severe mismatch between the demand for food and the supply of food. If I had said that there is now a greater mismatch than before, it would have been an extremely stupid statement.

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Revisiting the Cause of Unhappiness

It is over 2 years since I wrote my seminal post  “The Cause of Unhappiness”.  It is clear now that I had underestimated human ingenuity. Even with a force as powerful as nuclear weapons standing between humanity and periodic societal destruction, we have still managed, quite creditably, to bring ourselves to the verge of a cataclysm.   On that note, read point 13 of this list, which echoes my point.

More, Stronger, Effective

VK wants to know if I meant more, stronger or more effective regulations in the previous post.

If it is more,  well how much more? Which country has escaped a crisis by having more regulations? Of course, India can avoid the crisis that comes about when growth rate drops from 9% to 7%, if we are willing to accept a steady growth rate of 3%. The point is to manage crises without accepting stagnation in return. Now, I don’t accept that the US is a libertarian Mecca, but obviously, many of you think that it is close to one. But it also so happens that the US is one of the most prosperous countries in the world. It has experienced fewer and shallower crises than the rest, and has recovered from them faster than others. If you think that having few regulations is bad, then how do you account for this result? If you think that having more regulations is the answer, then how do you account for every other country in the world?

If it is stronger, well “stronger” presumably means having stricter punishments for the same crime. But you can’t punish an action if it is not a crime in the first place.  It was not a crime for companies to borrow from abroad, so unless you make it illegal, you can’t increase the punishment. 

If it is effective, is it something like what libertarians and communists supposedly say when their preferred systems supposedly fail? Just as a libertarian system has not yet failed because a truly libertarian system has not yet been tried, regulations have not yet failed because truly effective regulations have not yet been tried. What is an effective regulation? Whatever, in retrospect, could have prevented the last crisis.  If a regulation fails to prevent a crisis, then, by definition,  it is not effective, which means that effective regulations have not yet been tried. 

The challenge is to be able to predict in advance which regulations will be effective and to put in place a political system that has the will to impose only those regulations and not the other. So far, no one has figured this out.