The Riskiness of Putting Trust in the Best and the Brightest

by Don Boudreaux on March 3, 2010

in Country Problems, Financial Markets, Frenetic Fiddling, Hubris and humility, Intervention, Inventive intervention, Man of System, Nanny State, Regulation, Risk and Safety, The Crisis

The Washington Times‘s Tony Blankley makes a strong case against Uncle Sam’s proposed “systemic-risk regulator.”  Here are his concluding, and I think key, paragraphs:

But the purpose of the proposed systemic-risk regulator is not only to spot the impending systemic risk – but to intervene to prevent it from happening. Consider the power such a regulator would have. Consider that the existence of such a regulator would increase moral hazard – as it would be assumed that if the systemic regulator isn’t warning of danger, market players would be more likely to assume risk is low. And consider the consequences of using such power mistakenly.

For example, let’s say the regulator spots what he believes is a dangerous national real estate bubble. He acts quickly to snuff it out by raising interest rates or requiring minimum 40 percent down payments or some other intervention. What was a booming economy with 3 percent unemployment turns into a hard recession with 8 percent to 10 percent unemployment.

But later it is determined that it was not a bubble, but rather the beginning of what would have been a steady, healthy increase in value. Imagine if such a regulator had existed in 1955 and snuffed out the great post-World War II expansion that made America a prosperous middle-class nation of homeowners in suburbia rather than poorer renters in the city.

It is not given to the smartest people in the world the capacity to see the future, to discern with sufficient precision the details of the moment that cause the critical consequences in the future.

But it certainly is the lamentable history of man that we have the power to screw things up all the time. Remember the vaunted Japanese industrial policy of the 1970s that was going to permit Japan to shrewdly dominate the economic world over us hapless free-market countries with no governmental power to identify the industries of tomorrow?

In the end, the call for a systemic-risk regulator is yet another futile expression of faith in the power of government to outthink the markets. It is another foolish bet on bureaucrats and politicians in a tightly regulated economy being more likely to bring prosperity than free businessmen, investors and consumers in a free market. It is the biggest sucker bet in history: a bet on tyranny over liberty.

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