Another Sacred Cow: Deregulation


With the collapse of Lehman over the weekend, the distress sale of Merrill Lynch and the looming collapse of Washington Mutual and AIG — and who know what else — the urgency of imposing some form of regulation is beginning to be more widely recognized. It is increasingly apparent that, without it, we are facing a financial disaster of unprecedented proportions.

Paul Krugman writes in this morning’s New York Times: “The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock?”

He accuses our financial leaders of playing “”Russian Roulette,” but that is simply another form of denial. Taking such chances is based on believing that you really can’t lose.


The mortgage crisis brings home again our need for some form of market regulation.  Without it there is little check on speculation or manipulation and great danger of markets running amok.  But regulation seems now to be in that great dead zone of ideas that we can’t get our minds to engage.

So haunted with associations to old style capitalism, so discredited, such a bad idea, we stop thinking as we get close to it.  Whether it is the fear of ridicule from our peers, or the fear of being ostracized, or just the fear of being seen as stupid or out of touch, we keep our minds at a distance from the danger.  The surge of growth that followed deregulation, the victory of capitalism with the breakup of the Soviet empire, the power of special interest and their lobbyists on Capital Hill, the evisceration of existing regulatory agencies — all have become sources of intimidation to anyone interested in curbing the power of corporations to compete freely in the market.

“Groupthink” has familiarized us with how groups censor and proscribe thoughts that deviate from an emerging consensus.  The failure of Kennedy’s advisors at the Bay of Pigs, Nixon and Watergate, even Bush and the famous WMD — all are good examples of how thought gets obliterated.  This dead zone of thought operates on a larger scale — but it too is fueled by anxiety and fear and is no less pernicious to rational solutions to the problems we face.

To be sure, old style regulation did stand in the way of growth, and deregulation did seem to fuel significant growth.  Moreover, critics will add, there remain a host of regulatory rules that businesses and banks must comply with. But, surely, there is a middle way now in playing an active role to guide the private sector away from the disasters of unbridled competition.  If Washington can’t do a good job of it, perhaps a quasi-private amalgam of senior financial statesmen, ratings agencies, and foundations could step up to the plate.  But in order for that to happen, we would have to face the need — and to do that we would have to keep the need in mind.

What we don’t know we know about deregulation is how frightened we are to do that.