Two interesting recent articles, from left and right, argue that the finance industry is especially in need of restraint imposed by government regulation.
From the left, Paul Krugman, “Why We Regulate.” Gilded age banks, with little regulation, had bank panics every 6 years, on average. Bank regulation in the 1930s gave us a half century of relative stability. “Eventually, however, the lessons of history were forgotten. New forms of banking without government guarantees proliferated, while both conventional and newfangled banks were allowed to take on ever-greater risks. Sure enough, we eventually suffered the 21st-century version of a Gilded Age banking panic, with terrible consequences…. The key point is not that the bet went bad; it is that institutions playing a key role in the financial system have no business making such bets, least of all when those institutions are backed by taxpayer guarantees.
A rare instance where left and right meet.
From the right, Jerry Muller, “Our epistemological depression.” Each crisis involves some causes that are familiar, and some that are new. What is novel about our current crisis is the role of opacity and pseudo-objectivity. A large role was played by the failure of the private and corporate actors to understand what they were doing. Most heads of ailing or deceased financial institutions did not comprehend the degree of risk and exposure entailed by the dealings of their underlings—and many investors, including municipalities and pension funds, bought financial instruments without understanding the risks involved. We should keep this in mind when we chastise government agencies such as the SEC for failing to monitor what was going on. If the leading executives of financial firms failed to understand what was taking place, how could we expect government regulators to do so? The financial system created a fog so thick that even its captains could not navigate it…. Two milestones in the process of creating the fog of finance were the transformation of Wall Street investment banks from private partnerships to publicly traded corporations (beginning with Salomon Brothers in 1986), and the repeal of the Glass-Steagall Act of 1933 through the Gramm-Leach-Bliley Act of 1999…. Looking ahead, the sort of government regulation and private re-organization that will be most beneficial will focus on these epistemological problems… It means, in short, the reformulation of something like the Glass-Steagall Act, which would separate savings banks, investment banks, insurance and brokerage from one another.”