Saturday, July 26, 2008

Regulation: An End to Laissez-Faire Capitalism?

Sources: Wall Street Journal, New York Times

After nearly thirty years of deregulation throughout the U.S. economy, law makers and key financial leaders are looking to reverse the trend, if only temporarily. On Thursday, the House Financial Services Committee held a hearing where SEC Chairman Cox solicited more power to control investment banks and their parent companies. Mr. Cox stated that the system can be modernized by expanding what has worked in the past and learning lessons from failed regulation. The New York Fed President Timothy Geithner went a step further proclaiming his belief that the entire financial regulatory structure be reviewed.

The Federal Reserve Vice Chairman Alan Blinder frames the move toward more regulation as a “backlash against the laissez-fair” viewpoint. He believes the creativity fostered in such an environment is what led to the mortgage and credit crisis. According to a Wall Street Journal/NBC News poll, his thoughts are paralleled by the public. Roughly a decade ago, Americans disfavored government involvement in the economy by a ratio of two-to-one. Now they desire more government action by a 53% to 42% margin.

The Fed has already given billions of emergency funds to Bear Stearns, Fannie Mae, and Freddie Mac. Some economists, however, believe the increase in regulation will be short-lived. Kevin Hassett of the American Enterprise Institute compares the Fed’s recent actions with the $125 billion expenditure following the collapse of savings and loan banks in the 1980’s. He noted that the government involvement in the financial sector stopped as soon as the situation stabilized.

1. Who has a more accurate viewpoint: Mr. Cox or Mr. Geithner? Can lawmakers work with the current regulation to satisfy the public's desire and stabilize the financial sector of should lawmakers start from scratch?
2. How will increased regulation affect new businesses within the U.S.? Will it foster growth by providing a more stable environment or hinder growth by creating barriers?
3. Will this swell in regulation and government involvement continue or will it subside as it did in the 1980’s?

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