There is a nearly universal consensus that financial regulation needs to be reformed. But is now a good time to be discussing the reforms? Judge Richard Posner says no. In fact, we may be hindering our economic recovery by proposing new regulations during the economic downturn.
“But the most important point I would make is that there should be no new regulatory measures until the depression reaches bottom and recovery begins (not that there can be certainty about when that point has been reached–there were several false bottoms in the 1930s depression),” Posner wrote earlier this month. “Any regulatory initiatives at this time will simply increase the already great uncertainty in which the financial industry is operating; and as Keynes pointed out, anything that increases uncertainty in a depression causes hoarding, which can in turn precipitate a deflation likely to deepen and protract an economic downturn.”
What’s more, government bureaucracies tend to use crises to increase their own power in ways that might not provide the promised benefits. The worst result would be a reform that actually added risk to the financial system, a serious possibility if we create a sense of false confidence in new regulatory structures that have not been properly constructed. It’s not enough to do something. We have to try to do the right thing.