40 ms·
Effective regulations are those regulations that change the balance of incentives to remove moral hazards and internalize externalities.
by RyanMcGreal 17y ago
Effective regulations are those regulations that change the balance of incentives to remove moral hazards and internalize externalities.
- btilly 17y agoThat is true. But the organizations that have been forced to internalize externalities have a strong desire to externalize them again. And will try to change the regulations to allow them to do so. Success is generally a question of when, not if. As an example we averaged one credit crisis per decade for over a hundred years. Then Depression era regulations such as Glass-Steagall put an end to that for several decades. The regulations were eroded then finally removed, and a decade later we had a credit crisis. The Depression era regulations succeeded. But a later generation came to believe that the threat they were blocking was hollow, and the regulations changed.
- anamax 17y agoAnd unicorns are magic horses. The properties of ideal entities aren't much use in a universe where nothing approximating such entities actually exists. Note that Fannie and Freddie actually lied about the mortgages pools that they constructed (said mortgages contained more subprime than they admitted). This not only defrauded the folks who bought those pools, it also made the entire mortgage market look safer than it actually was. Note that it was regulators who pushed subprime mortgages and insurance for such securities (so they could justify "encouraging" banks to hold them as regulated assets). Said regulators also gave ratings monopoly AND told banks that they had to hold Fannie and Freddie stock, which put many of them into technical default when Fannie and Freddie went down. At best, regulation is systemic risk. Often, it's corruption backed by a threat of violence.