"Fixing Finance" a Delusion, Says The Economist. About Time Someone Said It

Financial busts are an inescapable consequence of innovation, The Economist intelligently argues, and the impulse to control them is misguided.

Governments face a choice, the Economist says. They can accept that no amount of regulation can eliminate risk, or they can embark on a quixotic quest to control and eliminate risk and thereby doom the economy to anemic growth:

there are two reasons to hesitate before plunging headlong into a purge of the system. First, finance was not solely to blame for the crisis. Lax monetary policy also played a starring role. Low interest rates boosted the prices of assets, especially of housing, which in turn fed into complex debt securities. This created a spiral of debt that is only now being unwound…

The second reason to hesitate is that bold re-regulation could damage the very economies it is designed to protect. At times like this, the temptation is for tighter controls to rein in risk-takers, so that those regular, painful crashes could be avoided. It is an honourable aim, but a mistaken one.

Regulators cannot know how trust will ebb and flow as new markets develop the experience and practice they need to work better. They therefore cannot predict the peril of new ideas. They have to let new markets develop, or stifle them. The system learns—dangerous junk bonds are reborn as respectable high-yield debt; bankers will now be scared of extreme leverage—but it is delicate, as the world learned last summer.

Busts are painful, but anyone claiming that they can prevent the next one is selling snake oil.

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