The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits — in particular, the benefits of avoiding low-probability events with disastrous consequences.

Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human beings to underestimate the odds of such seemingly unlikely events — of forgetting that the 100-year flood is as likely to happen in Year 5 as it is in Year 95. And if there are insufficient data to calculate the probability of a very bad outcome, as is often the case, that doesn’t mean we should assume the probability is zero.

-Steven Pearlstein


Fascinating quote that explains the game theory — and mathematical foibles — of the deregulatory free market extremists. This perfectly sums up the rationalizations used by those people who have emphasized the costs of regulation, but not the upside.

In a Democracy, when taxpayers have attempted to collectively protect themselves against corporate (and other) monied interests have had to argue against a growth storyline. That of course, turns out to have been a false narrative, but it carried the day for decades.

Pearlstein adds:

The biggest oil spill ever. The biggest financial crisis since the Great Depression. The deadliest mine disaster in 25 years. One recall after another of toys from China, of vehicles from Toyota, of hamburgers from roach-infested processing plants. The whole Vioxx fiasco. And let’s not forget the biggest climate threat since the Ice Age.

Even if you’re not into conspiracy theories, it’s hard to ignore the common thread running through these recent crises . . . regulators who were blinded by their ideological bias against government interference and their faith that industries could police themselves.”

What we have done, in essence, by following the ideologies of the Chicago School and others absolute Free Market believers, is to adopt the Victor Niederhoffer approach to trading risk. Niederhoffer writes puts on low probability events. This trades off short term gains over a period of time, in exchange for a longer term risk. He understands and accepts this. For a few years, he does very well — until he blows up spectacularly. Indeed, the way Nassim Taleb came to prominence was being on the other side of Niederhoffer’s trades, betting on the eventual reveal of a Black Swan.

The deregulatory approach is quite similar: We get faster growth, more profits, but occasional spectacular blowups.

Perhaps the best way to think about what (I have derisively termed) free market extremism and radical deregulation is to recognize what they are preaching: Its a high-risk, put writing strategy. Over the near term (A decade or 3), it guns growth and seems to be working. Mathematically, it is guaranteed to end in disaster . . .


Time for industry to end its war on regulation
Steven Pearlstein
Washington Post, May 26, 2010; A13

Category: Bailouts, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

50 Responses to “Understating the Benefits of Avoiding Low-Probability Disastrous Consequences”

  1. dussasr says:

    A lot of truth there. Unfortunately, the regulators have demonstrated themselves to be particularly poor at preventing the low probability, disastrous consequence events. They generally aren’t awake long enough to see one coming and that’s assuming they have the vision to see it in the first place.

  2. cswake says:

    “And on Tuesday we read a report from the Interior Department’s inspector general describing how oil company employees filled out government inspection reports for their own drilling rigs in pencil so that real inspectors could just trace over the results in pen before filing them.”

    Isn’t that a sign that sufficient regulation exists, but the entire system is corrupt? How would more regulation solve that? (Same applies for the SEC/FINRA and Wall Street)

  3. Transor Z says:

    Don’t forget McNeil/J&J’s “voluntary recall” of Children’s Tylenol in advance of an FDA inspection report:

  4. wally says:

    Regulation limits the known-to-be-probable disasters and thereby allows a larger and more complex system to form… which, as mathematicians show us, is prone to rare but even more disastrous collapses.

    You can chase this one up one side of the hill and down the other, but these ‘events’ will always happen no matter how you regulate.


    BR: But is the solution to not regulate? Some people seem to be taking that Black & White perspective — its either or . . . I don’t buy into that paradigm

  5. beatstreet says:

    What free market? You take the wrong lesson from all of this. Most of these disasters are enabled and encouraged by governement.

    Here’s another coming soon. This is Steve Eisman’s presentation at the Ira Sohn Conference on the for-profit education industry.

    Millions of folks will be saddled with billions in debt they can never, ever repay. Not one dime of it could exist w/o the federal gov’ts grants and guarantees. The execs of these for-profit schools are making hedge fund type money, and its got nothing to do w/the free market.


    BR: “Everything is the government’s fault!” Please, give this bullshit a rest.

    Such tired nonsense. We had the closest proximation to a free market that you will ever see in your lifetime.

    The Ira Sohn conference, and the debt, are two separate issues — that you would conflate the two reveals your how empty your arguments are.

  6. rktbrkr says:

    The jobless recovery steams ahead!

    Eliminate 9000 decent jobs in the US add 6000 third world jobs. Sweet. Just the opposite of Henry Ford paying his workers enough to buy their own products.

    Maybe we all need to become 100K/yr prison guards and schoolteachers!

  7. wunsacon says:

    In part, we have inept regulation because politicians will “look bad” if their appointed regulators step in before the disaster. They’ll look “bad” in the eyes of the many voters who don’t like government looking over the shoulders of business and don’t like paying for government. In other words, our regulation suffers in part by choice.

  8. teraflop says:

    Engineers need better lobbyists: why the leftist “boot on neck” castigation wasn’t directed at banksters is a tell for who pulls and cuts the strings. As for sensitivity to low-probability events, it’s caused by a human predilection for relying overly on forecasts (of any nature) and risk management (of any type).

  9. dead hobo says:

    The only flaw in your argument is that you assume enough people really care enough to do something about it. Successful people put the cost of important things onto someone else and hide it by making it a deferred cost. Then they generally become popular for being genius at solving complicated problems at no cost that would have had a high cost if solved immediately. Stupid people are a natural and renewable resource for successful people.

  10. gregskidmore says:

    What we are seeing is that regulation without proper enforcement is a horrible waste of resources and does not prevent negative tail events. It drains the resources of firms who voluntarily keep up with regulatory rules. These firms are unlikely to cause the tail events anyway. In contrast, firms that choose to ignore regulatory rules do so knowing that the odds of detection are low and the fines are not dangerous to their economic survival. Ignoring regulation often provides these firms with a competitive advantage and creates outsized risk for an industry.

    Doesn’t it seem that having fewer rules that are enforceable is favorable to having many rules that are not enforceable?

  11. flipspiceland says:

    We don’t have a democracy. It’s a REPUBLIC! If we can keep it.

  12. Mike in Nola says:

    Hussman had a few comments on misjudging probabilities this week using the oil spill as an example and extending that to finance.

  13. catman says:

    Buy now pay later, no?

  14. quints says:

    I’m disappointed. You may not be wrong about regulation, but the LOGIC SUCKS. Just because we had disasters without regulation does not prove or even imply that these disasters would not have occurred with regulation. You have to show lack of regulation as the cause, and that has not occurred.

    BOGUS reasoning…..

    …..this blog is the last place I’d have expected to see that.


    : That is true. You are technically correct, and I need, to do something about it.

    My problem is, this post isn’t the only thing I’ve said about it. In fact, I wrote a 342 page book explaining EXACTLY how radical deregulation was at the heart of the crisis. Its just too time consuming to rewrite that book every damn time I answer this or any other regulatory related question.

    So can we please just imply the following into every post here:

    “As I made clear in Bailout Nation, radical deregulation was a major causes of the crisis. In the present case . . . “

  15. Greg0658 says:

    kudos to another greg at 7:59 am – “regulation without proper enforcement is a horrible waste of resources”
    “having fewer rules that are enforceable is favorable to having many rules that are not enforceable”
    “drains the resources of firms who voluntarily keep up with regulatory rules” .. I’ll add – work to pay bills – try as hard as possible to stay away from lawyers

    saw in a book in the IMC – Greg = vigilant and watchful – keep trying too

    and another “All that is necessary for the triumph of evil is that good men do nothing”

  16. beatstreet says:

    BR, that wasn’t a fair response at all.

    Consider 3 years from now, when the issues Eisman talked about blow up for everyone to see. I can your posts now … “Blow-up in for-profit colleges (and the student debt) proves that the profit model does not work in education”

    Will you then acknowledge the fact that these institutions could not exist in anything close to the form they are in w/o the being enabled by the government, and that their executives are there not because they know anything about providing education, but because of their contacts in the government and their ability to game the system for their own profit.

    Everyone always feels like they’re living through history for the first time … economic collapses, mine disasters, oil spills, tainted foods, faulty products – this stuff has been going on for centuries under any number of governing ideologies. In other words – sh-t happens. LOL at thinking we can just replace one set of regulators and laws with another set and stop any of it.

    Pearlstein put on his Tom Friedman – “I’m going to take a few incidents, blow them up, and extrapolate them to some sort of major societal issue” – hat on, and you fell for it. Weak stuff.

  17. r says:

    BR – I encourage you to watch the excellent 60 minutes segment on the oil disaster. (they took the entire hour)

    An objective observer would conclude that there were proper regulations and safeguards in place. However, greedy, incompetent BP executives overrode the safeguards and incompetent regulators missed inspections and allowed BP to press ahead.

    Spending more money in government regulation would not have made a difference.

    The Madoff disaster is another example. SEC had plenty of funding, several warnings and the regulations were in place. They just didn’t do their job. And of course Madoff is mainly to blame. Is it true that no one else has been arrested for the Madoff fraud? Does anyone believe this was a one man operation for so many years? Are his wife and kids still multi-multi-millionnaires?

    Why on earth would we want to reward incompetence by throwing more money at the regulators? In the private sector, if you’re incompetent, you eventually go out of business.

  18. call me ahab says:

    ” . . . or even global warming. ”

    yeah- no doubt- just sitting around- and all of a sudden- it’s hot as a mofo- global warming- one of those unexpected things – you know- like an earthquake or flood-

    good thing I got a “global warming” rider on my homeowner’s policy- lol

  19. Greg0658 says:

    Greg the firefighter to the rescue .. thread down .. “Money is the root of all evil” .. abolish money before it extincts us .. figure a new way .. you can’t handle the widgets of the 21st century in a money driven world anymore

  20. powerpenguin says:

    There was a virgin thread going about the Chinese real estate bubble, with the government trying desperately to stop it but not powerful enough to do so. Chinese banks making the exact same mistake that both Japan and the US have made is probably the best proof that free markets simply do not self-regulate.

  21. seneca says:

    I applaud the overall assessment but do not agree with the high-risk put-writing analogy for this reason: when the high-risk puts expire worthless year after year, the company’s top EXECUTIVES, in effect, pocket most of the gains. But when the high-risk puts inevitably blow up, the company’s SHAREHOLDERS absorb the losses. The executives keep the millions or tens of millions they earned while the dice ran hot. When the dice eventually and inevitably come up snake eyes and the share price collapses, the top executives are chauffeured away from the resulting rubble fabulously rich men. This would not be the case if an individual sold high-risk puts and put his personal wealth at risk.

  22. Tarkus says:

    Regulations must be Enforced with Harsh punishment (rooming with Bubba – no Club Feds). Buying off politicians so industry can write its own “regulations” is no regulation at all. No one would argue to let drivers speed unregulated on busy city streets without traffic lights, but strangely some would advocate the same in the marketplace under the guise of “free markets”.

  23. Bernie638 says:

    There are risks in any complex engineering project. There are ways to assess risk using Probabilistic Risk Assessment.

    Regulation can reduce risk, but not eliminate it. There is no free lunch.

    Is Nuclear power with a core damage frequency of 5.09 x 10^-7 per plant per year too big a risk ?

    It is easy to argue a generic position on “regulation” or “deregulation” but how small a probability for disaster do you accept? That is the important question.

  24. The Curmudgeon says:

    Indeed Ahab, this vast free market experiment is causing the earth to warm. Darn. If we’d just had some competent regulators we could have forestalled disaster.

    This is a lame argument. Correlation is not causation. Today’s high temperature in my area is forecast to be much, much warmer than it was just a few months ago. Must be those incompetent regulators that are fostering an unfettered market in the sun’s gravitational pull such that the earth keeps spinning around it.

  25. Its called regulatory capture. (And worse)

    We’ve allowed a revolving door between industry and regulatory agencies. That is unacceptable, and its how Toyota managed to get their sticky accellerator problem ignored for FIVE YEARS — the promise of a job.

    We’ve gutted regulatory enforcement as well. There are no teeth to the rules, little in the way of budgeting or manpower commensurate with the task at hand. Pay the fine, move on. Just a cost of doing business.

    Over the decades, the Free market argument has been misused to create a regulatory sphere that is defective by design. I wondered if the Bush administration thought they could prove government does not work by being incompetent at it.

    We’ve done the same thing to the entire regulatory framework.

  26. Mannwich says:

    People now accept unofficial payoffs to look the other way everywhere in the workplace today. The mindset is one of wilfull ignorance, provided one is paid enough in money, power, or other perks. It’s largely a cultural problem and it’s not likely to get better any time soon.

  27. Transor Z says:

    The central concept that many commenters here are completely missing is risk management. Risk management happens at the individual, corporate, and societal levels.

    Two words: pandemic flu.

    Here’s a quick moron self-test. If you agree with the following paragraph, you are a moron:

    We should just abolish CDC and WHO because they were wrong about the seriousness of last year’s H1N1 outbreak. All of those vaccines and excessive precautions and PSAs were economically wasteful since they were out of proportion to the actual risk of last year’s strain. It proves that CDC and WHO are either incompetent or in bed with Pharma who wanted to make a quick buck off of public panic. CDC won’t prevent the inevitable pandemic, so just stop funding them. Planning for quarantine, vaccines, and national command centers is a huge waste of time since when the Big One hits we’re all going to die anyway.

  28. ashpelham2 says:

    You know, we bought Louisiana from the French for a song. I guess this is the British just crapping on that deal, jealous they didn’t get it first.

    Alabama and Mississippi have become too dependent on too little coastline. Those two states have done a lot to diversify their employment bases (auto, healthcare, others to a lesser extent).

    This is a disaster, but I think much more localized than we all believe at this time.

  29. tt says:

    regulatory capture by the oligarchs of the government cannot by it’s definition be fixed by more or better regulation.

    the only thing that will happen is more of the goldman sachs, bp……type control of upside down socialism. privatizing the profits and socializing the losses.

    br is wrong here. the problem was not free markets. the problem was corporatism. or fascism if you like mussolini’s own words. socialism turned on it’s head.

    a free market would have bankrupted citibank and exxon long ago. br is missing the point of actual free markets versus corporate fascism.

    great blog though. see for actual historical contexts of corporatism.

  30. darekkkk says:

    “The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits — in particular, the benefits of avoiding low-probability events with disastrous consequences”

    Let’ s talk about “regulation extremists” ;-).

    Are there any proofs that regulations could prevent?:
    - oil spills
    -cars defects
    -mine explosions etc.
    In fact, as far as I know, all those events happened despite regulations not because there was a lack of regulations.
    Faith that regulations are remedy for everything is naive. Polititcians should regulate how Toyota’s brakes are to be constructed?

  31. Deborah says:

    This also says nothing for continuously stomping on various small players before the big disaster. Deregulation has problems from start to end and it seems to only be the big disasters that make it get a second look.

  32. The Curmudgeon says:

    The best risk management in the world is to let fail those enterprises that don’t manage risk well. I think we’ll see it w/ BP in the Gulf. Too bad for BP it’s not a politically-connected part of the overwrought financial system that is so much more important to human affairs than is the gasoline that fuels our cars and oil that heats our homes.

  33. flipspiceland says:

    What all those guys above said re: existing laws and regulations and other supposed strictures X 1,000,000.

    The 5th commandment does not stop murder, nor does the death penalty or life in prison.

    Without the Enforcement, nada.

  34. Bernie638 says:

    What is an acceptable risk? We banned drilling off our coasts, that eliminates the risk of a spill off our coasts. I’ve heard that Russia had two or three large spill that they used nuclear bombs to stop. Is moderate regulation here with a large spill every 30 years(Valdez to BP) acceptable compared to more frequent disasters in areas that we don’t control?

    We regulated Nuclear power out of existence and we’re paying for that through Global warming, smog, coal, oil, and natural gas disasters.

  35. Tarkus says:

    What the Bush GOP did was prove Government doesn’t work – as long as THEY are in charge of it. Now the Democrats are following the same pattern. It’s almost like…they are all owned by the same group of interests…

  36. Bernie638 says:

    Was NASA under regulated? Is that why Challenger, and Columbia failed?

  37. Transor Z says:

    @Curmudgeon, Bernie638:

    Your comments hit on the core point here: which risks are acceptable, who determines, how are they measured, and how do you manage compliance in industries whose potential disasters may be measured in the hundreds of billions or trillions of dollars?

    Nuclear power, nuclear weapons, infectious disease research, oil drilling, etc. etc.

    But there’s another element here that shouldn’t be missed, especially if you lean libertarian: a fireworks company wants to site a plant next to an oil refinery. Regulation is needed not only to assure compliance within an industry, but also to manage the placement and interaction of industries that become riskier when placed next to certain other industries or population centers.

    But getting back to Bernie’s question, the key is whether the legislative/regulatory process is intelligent or not (or corrupt, same difference). The science and expertise required to determine how many bug parts per million is acceptable in peanut butter is too detailed for congress to manage; it’s left to agencies. But then we always come back to how regulations are drafted/regulatory capture. How do you ensure scientific objectivity/public interest when the best minds in a field are employed by the industry being regulated? (Because we all know that Hugh Hendry was right in dissing Jeffrey Sachs the other day) When the person we have to trust to go after Goldman and others at SEC is a former employee of DB?

    FDA is a prime example. Anybody think Pharma has incentives to downplay adverse events during clinical trials or fudge outcome data? Of course they do. New drug lines are worth billions and boost stock prices overnight. Thanks, but I’d rather not wait until one of my kids dies for the company responsible to pay the price for noncompliance.

    For me, the most evil meme out there right now is that government regulation is per se incompetent/corrupt. Sorry, but this is clearly a partisan meme that becomes a self-fulfilling prophecy when certain political types control the executive and sabotage oversight. And unbelievably, when the idiocy at the Minerals Management Service comes to light, people actually say this proves less regulation is better! Truly surreal.

    Sorry for the novel.

  38. ACS says:

    Seneca, it not millions or tens of millions but hundreds of millions in phoney compensation. BTW Victor Niederhoffer made one big mistake: he used his money. If you want to play that game and prosper you bet other other people’s money. Just ask Joe Cassano.

  39. The Curmudgeon says:

    @TZ, the political arguments for and against regulation are misplaced. One side believes government can solve all ills, the other side believes government is the source of all ills. Neither is correct, and people that argue one way or another are just sacrificing intelligence and objectivity to their emotional impulses.

    First we have to ask what we hope to accomplish by dint of regulation. Only then can we ask what strategy is best for achieving our objective. Sometimes the best regulation is to allow the market to push the bad apples out of the barrel. Sometimes the stakes are too high to endure such a slow-moving process, and government regulation is indicated. Some regulation is really efficient, e.g., it would be hideously inefficient if we each had to independently ascertain the effectiveness of each of the various compounds big pharma devises, so we hire the FDA to do it for us. Some regulation actually fosters the problems we try to prevent, like financial system calamities and the Federal Reserve regulation of the money supply.

    The takeoff is that the proper use of regulation requires objectivity and wisdom, two attributes sorely lacking amongst the political class.

  40. EAR says:

    Starve the beast, feed a monster.


    “Everyone always feels like they’re living through history for the first time … economic collapses (worst in 70 plus years), mine disasters (worst in 25 years), oil spills (worst ever in US), tainted foods, faulty products – this stuff has been going on for centuries under any number of governing ideologies.”

    All of this “stuff”… unmistakably profound and historic after 8 years of an ideologically driven NEGLECT of government. Government was not reduced in size, it’s responsiblities were neglected. In the case of the economic crisis, combine this with deregulatory moves like the repeal of Glass-Steagall and you’ve got a recipe for disaster… on steroids.

    The view that business will regulate themselves in order to stay competitive is infantile. The idea that government players can remove itself from the grasp of big business in order to properly and plainly set rules of the road… set what is acceptable and punishable… set up an environment where the boundaries are clear and businesses can operate and thrive within them… is a pipe dream.

    Why? We wake up every morning to the unprecedented results of the deregulation/”small” government experiment. During the day we point fingers at who was to blame and when. We go to bed at night wondering what the hell problem it will be tomorrow and how we’ll put off addressing it while we blame someone else. We are a hindsight nation that looks for a better tomorrow at the expense of the years ahead.

    Even at their weakest, rules protect most of us. If a number of children get sick because they took tainted medicine or if people die in a four wheeled faulty product you can say “sh-t happens” because there are rules out there that keep the sh-t from happening more frequently. It ain’t the benevolence of business, that’s for damn sure. They’ve had the chance to prove otherwise.

    It’s time for stronger rules to balance out the regulatory sloth that preceeded these disasters. It’s a reactionary pendulum swing but that’s what you get in a world where ideological extremes influence policy. A heavier hand and more scrutiny for corporations? After the past 3 years? I’m down with that.

  41. Marc P says:

    One of the themes running through the recent disasters is that as humans make systems ever larger, then the occasional human misjudgment has greater effect. This is not to excuse the regulation / deregulation debate, I only want to sidestep it for a moment to look at the picture from a different angle.

    The challenge with the oil plume is that with the technology to drill 5000 feet under the ocean comes the likelihood that someone will actually do it, while ignoring the increased costs of fixing the low-probability event. The challenge with having $400 trillion in derivatives in the world is that if only one-tenth of one percent go bad, then the world economic system collapses. (If Greece can create an existential event for the world economy, then we must assume that $400 billion in trading losses would as well.)

    The point I wanted to raise was to get the readers to think about another mega-scale technology with a low probability negative event with a massive negative result. In the past two weeks the press has been a-flutter with Craig Venter claiming that he can create synthetic life. Given these other recent disasters in oil, economy, mining, Toyota, Vioxx, isn’t it a reasonable guess that some form of synthetic life will get outside the lab, replicate wildly, and become a new form of biological kudzu? I see it as inevitable. Once it occurs it will be all but unstoppable. The synthetic life form will not be a dinosaur on some Pacific island. We can’t hit it with a cannon. It will be an algae or microbe. Millions of cells, multiplying to trillions, then trillions of trillions, and unlike dinosaurs we humans won’t be able to see them and thus stopping them will be difficult. I’m not suggesting that microbes will put a pillow over our heads while we sleep. Instead, it will be something helpful, like an oil-eating microbe built for cleaning up oil spills. Sounds great until it gets into an oil pipeline. Imagine the cost to the economy of shutting down our entire petroleum distribution system until the microbe is eradicated, if it can at all. TBTF may become TBT stop.

    I’m not posting as a crusader against bioengineering. I’ve never thought much about the field. I write to underscore the point that if we citizens permit construction of structures and systems that are so large as to have existential results, then we must face the existential risk.

    This actually suggests a solution. For example, if a oil well blowout 5000 feet under water is 10x harder to stop than in 500 feet, then requiring a bond or insurance for the risk creates a cost/benefit that is a natural limit on the venture. Putting a cap on damages has the opposite effect.

  42. Lugnut says:

    This post and the responses brought to mind Jeff Goldblum pouring water droplets on his hand to explain the intracasies of chaos theory, shortly before the T-Rex ate the Explorer. Better more graphic examples to prove your point are always lurking around the next corner unseen and waiting.

    A totally free market is worse than the regulatory capture/failure that we have now. At least with a free market, you know who to point fingers at in the event of a systematic failure. In our present system, idiots and criminals act under the auspices of a false blanket of federal regulation and oversight that allows them to bleat that they ARE playing by the rules when TSHTF.

    By feigning to provide regulation, examples like the BP disaster allow chuckleheads like Obama to say, “We’ll be looking at possibly changing the laws to make sure this never happens again.” Bullshit. The laws already existed, but the moral fortitude and willpower to resist complacency and cronyism and actually enforce the law did not, and sadly it is something that can never be legislated.

    The Chinese, for all their faults regarding their political system, law and capital punishment, seem to grasp this concept initmately, as the occasional execution of corrupt politicians and businessmen would seem to emphasize. Public hangings might deter a few more fence sitters more so than a weak bill by Chris Dodd, written by those it would seek to regulate.

    The system has been gamed to Nth degree, those that want to operate their businesses in a fashion to their choosing have determined how best to obtain the legal, regulatory, and market advantages to do so, with minimal repurcussions. Our nation has become blind as to just how pervasive it is, and we are only given glimpses of the true extent of it when these 1000th percentile type events occur and allow things to spin out of control and into the public realm (S&L crisis, Enron, Worldcom, BP, sub-primes, financial meltdown, etc). The limited extent to which those responsible are ultimately held respsonsible tells you the extend of their true power. Enron f’ed up, some folks actually went to jail. The banks melt down and take the economy with it, and no one goes to jail, no one is singled out, and the taxpayers foot the bill for those on the bad side of the trade. Case in point the ‘Greece Bailout’, which is nothing more than a banker bailout. Its a huge joke without a punchline. Increasingly the only way in which (the bezzle) it can be ‘resolved’ is, I imagine, not going to be an approrpaite topic on a financial blog.

    Carpe diem

  43. RW says:

    Even if BR had not written “Bailout Nation,” making a reasonable case that regulatory capture was a primary factor in the financial debacle, it would be a logical fallacy to demand that he or anyone else prove the negative; i.e., that it was deregulation that ’caused’ financial catastrophe.

    Causality WRT financial catastrophe is adequately explained by greed, stupidity and venality released in a system in which those attributes found free rein and ready access to the levers of power. The burden of proof WRT the role of deregulation or corruption of regulators in that release is on those who favored that system, not on those who warned of the danger or were harmed by its consequences.

    “The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair.” – Douglas Adams (from Mostly Harmless, fifth book in the Hitchhiker’s Guide to the Galaxy series)

    The precautionary principle states that when the cost of something going wrong has a likely cost orders of magnitude greater than the longitudinal cost of insuring* against it then wisdom dictates you buy insurance and budget accordingly.

    Insurance here is writ large of course, not just a financial product; e.g., sometimes the best insurance means just not allowing something to be done or seeing to it that regulators have the appropriate incentives and resources to do their jobs well.

  44. Casual Onlooker says:

    People have a SELECTIVE MEMORY to where regulation does work, there are many examples out there that are easy to find.

    Off the top of my head I can think of the clean air act that among other things removed lead from gasoline. I remember as a young kid, before the provisions took affect, visiting Los Angeles. My biggest memory of that time was how badly my eyes hurt while I was there. It was very, very uncomfortable. I have been back there many times as an adult, I can can speak first hand as to how much better the air is.

    There are many more examples.

    Now nothing is perfect. The world is complicated, and as we advance it will become more complicated. There is no panacea. Regulation isn’t a static thing, you don’t just put it in place, walk away and say “hey now I’m safe”. The arguments that regulation doesn’t work at all , that everyone is corrupt, and so forth, is self-serving, disingenuous, mean-spirited, and remarkably short sighted.

  45. mkkby says:

    At least in the markets, 100 year floods seem to happen every 2-4 years. This calls into question the assumption that markets behave according to a normal distribution. If the mathematics are wrong, the conclusions are as well (i.e. garbage in, garbage out). Hence, black swans appear much more often than they “should”.

  46. Bernie638 says:

    Determining the correct amount of risk or regulation is tough because you never see the successes, only the failures. How many spills did the minerals management service prevent?

    However the idea that profit driven companies are evil and need excessive regulation is misguided. The worst disasters have been in places without profit motives. Neither the Hydro plant in Siberia nor Chernobyl was not a for profit utility, the US government ran nuclear and chemical weapons programs that were responsible for contaminating large areas in NY, WA, KY, NV in the 60s and 70s. The problems in China from milk to earthquakes are not caused by weak regulators or a lack of regulative authority.

    A “for profit” corporation has an incentive to not have its investment (oil rig, nuclear plant, mine) destroyed in an accident.

    Would reduced regulations have kept Union Carbide safer in the US than it was in India? How do you balance US safety vs the safety record in other countries?

  47. Brett Tibbitts says:

    Perhaps I am wrong Barry, but it appears you are far more concerned with “free market extremists” than the equally troublesome problem of ineffective government regulation. Clearly, the markets need appropriate regulation. You make the case more than well. But what about stupid and ineffective government regulation – such as OFHEO? Fannie Mae and Freddie Mac were among the most regulated corporations in US history and they had an entire governmental regulator (OFHEO) assigned to monitor them. What good did OFHEO do to prevent the downfall of Fannie Mae and Freddie Mac? Absolutely nothing. Because the regulation had become completely politicized. Which PERHAPS is a worse problem than free market extremism.

  48. I know what the dangers of each are:

    • Too much regulation crimps growth. Think late 1960s/70s — the post WW2 expansion of the regualtory environment had gone too far.

    • Too much self-regulation/free market absolutism leads to events such as enumerated above.

    As is often the case, the best solution is a pragmatic (rather than ideological) approach that tries to balance the competing needs of growth and disaster avoidance . . .


    As to OFHEO, they were bought and paid for by FNM/FRE. There was no regulatory authority there –t hey were totally ands utterly captured

  49. Money Mischief says:

    There are many well proven free market solutions for managing low probability events. The entire insurance industry, for one. Prudent banking practices, credit default swaps, futures markets, put options, etc. all protect against low probability events and are all free market solutions.
    One of the root causes of the credit crises was the “too big to fail” mentality on the part of large financial institutions, the belief that their regulators (like the Fed) would bail them out. That is hardly the fault of the free market, and in fact seriously distorted free market operation by causing those institutions to essentially disregard risk.
    Prior to the “development” of the Greenspan/Bernanke put, free markets did an excellent job of managing low probability risks, and indeed their records were far better than those of highly regulated/controlled markets historically.

  50. ezrasfund says:

    A most important point in all of this is the disaster that is avoided and thus unseen and unknown.

    If some meddlesome regulator had prevailed in 1998 and required all airline cockpit doors to be locked we might have avoided the tragedy of 9/11.

    If that meddlesome regulation had prevented the 9/11 tragedy, some would still be cursing those burdensome regulations which do nothing but impede our freedoms.