The Best Regulator is the Market


Over at The Daily Beast, Reason columnist and Mercatus Center economist Veronique de Rugy looks at recent revelations of regulatory capture on Wall Street. A bank examiner from the New York Fed, Carmen Segarra, started asking questions at Goldman Sachs and quickly discovered what readers of public-choice economics have known for years: Regulators routinely serve the interests of the firms they're supposed to control in the name of the public interest. Writes de Rugy,

It is fair to ask what the point of a complex and burdensome regulatory system is if the rules are so easily ignored by the companies they are supposed to constrain. Isn't the main reason behind these rules that taxpayers' money is on the line—since the government has granted an implicit promise to bail out big companies in distress? But if the rules aren't doing their job, and the implicit bailout is encouraging firms to be reckless, aren't taxpayers left doubly exposed? If we can't control these financial institutions either way, it seems that the best regulation is the discipline imposed by the market. Companies that act badly should go under. This is how you get rid of bad actors, warn the future bad ones that there will be no bailout, and save us from the drama of finding out what a joke this pretense of oversight really is.

Whole thing here.