The heart of the matter

Cite this Article
Geoffrey A. Manne, The heart of the matter, Truth on the Market (January 19, 2009),

David Evans gets to the heart of the matter:

The problem that we now face involves fixing many different aspects of our financial system—from incentive systems that encouraged excessive risk taking (do we really believe bankers are innately more greedy than anyone else?), to financial engineers who didn’t think through the consequences of their innovations, to a vast maze of regulations that obviously didn’t work (remember this is probably one the most regulated sectors of the economy in terms of the numbers of regulations and regulators), to political institutions that even now focus on short-run elections rather than long-run growth and prosperity.

The problem is the classic Hayekian one:  Finding anyone or any group with capacity enough to do more good than harm in dealing with complexity this mind boggling. I’ll wager that the group with misaligned political incentives isn’t going to be the right one.  But the regulatory train has already left the station and, although I think the current dynamic (“The benighted government must do something, something huge, to fix the problem and prevent evil, greedy bankers from screwing everything up again”) is pernicious, it just necessitates more scrutiny and care by those who don’t accept its premise as given.  As David says, what we need now is thinking that is “calm, measured and focused on mitigating total disaster.”