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Source link: http://archive.mises.org/8567/a-problem-of-regulation/

A problem of regulation?

September 21, 2008 by

The financial panic that has engulfed the planet is considered by politicians, bureaucrats, journalists and mainstream economists to be a problem of regulation. I find myself in the uncomfortable position of having to agree with this gang of opinion makers, but it is not a problem of insufficient regulation, inadequate regulation, unenforced regulation, out-dated regulation, or anything of the kind.

The problem is with regulation itself. With regard to financial markets, government regulates everything. There is the Federal Reserve that regulates the money supply, interest rates and everything else. There is the Treasury with its array of regulatory powers.

There is the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board. Government has multiple layers of regulators concerning mortgages, financial institutions, and stock markets.

I have taught money and banking and was formerly the Assistant Superintendent of Banking in the state of Alabama and I can not think of a single thing related to this financial crisis that is not regulated.

Government regulation is the problem. Since going off the gold standard in 1971 we have experienced a series of bubble and bust cycles in the economy and each time the crisis has been dealt with bailouts, more regulations, and loosening of gold standard era constraints. The money supply as measured by M2 had long been just a couple of hundred billion and is now approaching $8 trillion dollars and we supposedly are still suffering from a lack of liquidity!

The American public once again finds itself playing 3 Card Monty with a dealer who insists we play and tells us that we cannot lose. We will put our bailout money down on the table, we will be reassured that we cannot lose (with more government regulation and “oversight”), the Fed will inject more fiat money and when the cups are turned we will all have our wealth ripped off.

What the American public needs to be told is that the crisis is actually the market trying to reestablish some rational order in the economy beset by regulation. It is the market that is tearing down these mega financial firms and disposing of the crazy financial products that they created. It is the market that is punishing those who grew rich on paper money schemes, derivatives, sub prime mortgages, and hedge funds. These are the same people the taxpayer is being asked to bail out–Wall Street fat cats.

What the American public needs to hear is that regulation is the problem and that the “unfettered market” is the only way to break out of the business cycle. All that is required is a gold coin system of money and for the rule of law to be applied to banking whereby demand deposits are held as reserves in the bank. The economics of gold would regulate the money supply and the interest rate would regulate the amount of demand and time deposits as well as borrowing and lending. No government regulation is required. There is no systemic or macroeconomic risk and the market eliminates the business cycle.

The only requirement is the legal recognition of the statement in the US Constitution that gold and silver are money. The market can handle everything else.


Chris September 21, 2008 at 2:55 pm

You can’t have the biggest government on the planet and “unfettered competition.”

It’s either one or the other.

Evidently, many people seem to think we have both.

Stranger September 21, 2008 at 3:49 pm

The problem with regulation, as with all social problems, is whether we should have private regulation or public regulation. Public regulation clearly failed to run the financial system. It is time to try private regulation.

Walt D. September 21, 2008 at 6:23 pm

Austrian Economics in the Los Angeles Times of all places?

“The last thing we need is to slap more rules on the system. . . . From time to time, businesses fail and the worst thing a government can do is to bail them out because that just passes the cost on to the taxpayer and creates a moral hazard.”

Perhaps you’re getting the message across!

Bruce Koerber September 21, 2008 at 7:33 pm

Regulation is another term for intervention. For some reason using the term ‘regulation’ is more acceptable, a sugar coating. The indoctrination that has been going on for 5-6 generations even refers to ‘regulation’ as a good thing.

Whereas ‘intervention’ is a more accurate and a stronger word and may actually cause revolt.

We have to get the word out that ‘regulation’ is a inadequate term. Just like ‘politician’ is an inadequate term. Unless a statesman like Ron Paul (then the term statesman is sufficient) all politicians are ego-driven interventionists. How many people would put up with ego-driven interventionists and how many people would put up with their intervenion (regulation)?

Anitra Freeman September 21, 2008 at 8:14 pm

You are conflating micro-management of business decisions with regulations.

In order to keep a free market free, government provides an environment in which all parties can negotiate freely (no overwhelming imbalance of power), full information is available to all parties (no fraud or insider trading), all parties are held accountable to contracts, conflicting claims can be mediated in court instead of by force. Do you object to any of those regulatory functions?

An essential element of free market capitalism, as identified by Adam Smith, is that sellers must bear the full cost of the products they sell and pass them on in the sale price. The policies practiced by self-styled “conservatives” for the last thirty years have undermined any free market. Instead of letting business increase profits by finding more efficient ways to produce goods, “pro-business conservatives” have “helped” business increase profits by lowering taxes (transferring the costs of maintaining a country to do business in to the rest of us), eliminating pesky health, safety and environmental regulations (transferring the costs of any damage done to the rest of us), and outright giving them taxpayer money. When business costs are high they pass them on to the customer, and when they are lower they do not pass the savings on: why should they? Market incentives have been replaced by government incentives — and it was “conservative economists” who encouraged it.

Let government govern: establish a legal environment that protects public interests, individual rights, and the integrity of contracts, and then let business operate freely within that environment.

The latest bailout proposals make naked the fact that there is nothing “conservative” about the people calling themselves “conservative” for the last thirty years. They have never wanted to “free the market,” they have always wanted to own it. Now they are about to, and you still think the market problem is “too much regulation”?

Marcello September 21, 2008 at 8:29 pm

Anitra Freeman that sounds all good and greatusing vague terms and compassionate talk but why can’t the free market regulate itself? Maybe only insiders should be trading and the averge Joe who doesn’t know a thing about markets should not be trading? mmkay?

Anitra Freeman September 21, 2008 at 8:55 pm

Marcello, the “free market” is all economic exchange, including your purchase of milk at the grocery store. If grocery stores, truckers, and agribusiness were to collude to set an artificially high price for milk, would you consider that “free trade” or would you call for the police?

When agribusiness is given price breaks and price supports, the cost of your milk is no longer set by the supply-and-demand mechanisms of free trade.

Mark Glasgow September 21, 2008 at 9:11 pm


A free market always regulates itself but what we’ve seen is not a free market but a market become dependent on government to regulate it and we all know where that has brought us…to near slavery. Liberty has its price but too few are willing to pay it. It is really a simple matter, only freemen will have the courage to do what is so urgently required and the rest will be led like sheep to their slaughter.

Walt D. September 21, 2008 at 9:54 pm

Austrian Economics in the Los Angeles Times of all places?

“The last thing we need is to slap more rules on the system. . . . From time to time, businesses fail and the worst thing a government can do is to bail them out because that just passes the cost on to the taxpayer and creates a moral hazard.”

Perhaps you’re getting the message across!

Doug Mort September 21, 2008 at 10:32 pm

All very interesting. No one has attempted to explain how we get on our economic feet again. If you believe that allowing a worldwide economic collapse is the best medicine for what ails us tonight, then you need to understand this: that’s the reason nobody takes libertarians serious. Telling 99% of America “I told you so” isn’t going to ingratiate you to anyone. How we got here is important to understand. But how we unwind this mess, in the least harmful manner, is going to take a lot more than has been posited here. I believe that Mr Thornton is correct that under regulation is not the problem, but it is ridiculous to think that no regulation is the answer or that returning to the gold standard will solve the problem. Can anyone tell me, when has the gold standard ever removed the business cycle? Get real. If your answer is, it’s never been strictly adhered to. Then I’ll say it again, get real. Economics 101. Economics is the study of human behavior. Strict adherence to anything will never endure in the arena of human behavior.

Fred Mann September 21, 2008 at 10:42 pm

Price controls ARE regulations, and yes, they cause major problems (shortage or surplus … always). So I’m not sure what your point is.
As for cartels forming and controlling the price of milk, this would never happen in a free market because a new entrepreneur would always be free to enter the market and supply the milk under the cartel’s price while still making a profit.
Regulations approximate the effect cartels by reducing competition. Every regulation NECESSARILY reduces competition by providing a barrier to entry. This causes higher prices and lower quality of service … again, NECESSARILY. As regulations are increased, we approach monopoly prices and monopoly “quality” of service.

Peter September 22, 2008 at 12:02 am

If grocery stores, truckers, and agribusiness were to collude to set an artificially high price for milk, would you consider that “free trade” or would you call for the police?

Yes, we’d call that free trade. The people who own the milk can offer it for sale at whatever price they want, or refuse to sell at any price. As long as they’re not pointing guns at anyone, that’s freedom.

Jeremy September 22, 2008 at 12:05 am


The Federal Reserve can put off the collapse, but they cannot prevent it. And the more measures they put in place to prevent it, the worse it will be.

It’s not about ‘I told you so’ – it’s what’s in the best interests of this country. You and other interventionists do not understand just how severe the current bailouts taking place will make the eventual collapse.

Let’s put it another way: A collapse of the financial system today would leave all goods, capital, and resources in the economy currently intact.

Trying to save the financial system by pouring tons of the real factors above just means they will also be degraded or destroyed through further malinvestment.

The bank of Amsterdam was on a 100% reserve, audited gold standard for about 200 years. It served as a haven for money as wars ravaged the rest of the European continent, and helped stabilize the city’s economy (see Jesus Huerta de Soto’s Money, Bank Credit, and Economic cycles).

The problem is education, or rather false theories and control of the government, media, and most institutions of higher learning by those who will fight to the death over the issue of free money. If the vast majority of Americans understood the issues of sound money correctly, like many did in the 19th century, we would not be facing the potential collapse of the US dollar in the coming years, as the Federal Reserve would have been destroyed years ago, and in its place put a system of sound money.

Pierre September 22, 2008 at 12:05 am

And then there were none.
GS and MS under the control of the Fed as of today.
JM Keynes finally achieved his goal: central planning of the financial sector by a central bank.
This also proves Mises: there is no middle road.
Let’s pray for the dark times ahead.


Arend September 22, 2008 at 3:43 am

What’s interesting about these historical events is the way how goverments can lure the majority of the people into thinking these measures are actually necessary and essential for the survival of the economy. What about that? Are government people that smart? Out of the question. Is the majority of the people so dumb? Could be, could be, but still it’s amazing to see how a even more regulated and state-owned financial system can make people believe market failure is combatted.

But as Robert Higgs says, accelerating state growth are mostly the result of crises. This is the law of uncivilization under which we live. Crises will endure as long as a group of people can go on doing what they’re doing without really knowing what they’re doing and without being held accountable for it because they are the ultimate touching stone and without failure. Stockholm Syndrome ftw!

Haas September 22, 2008 at 4:37 am


You have to let these businesses collapse to get back to equilibrium (that is economics 101) let the chicken come home to roost – there is no wonderland that you can get to by printing more money and try to “bail out” companies when in fact it is just adding debt to the taxpayer…let those who made the mistakes pay for them that is how you learn and avoid moral hazard -the truth hurts but at least the truth will set you free

gene berman September 22, 2008 at 8:12 am


Didn’t read the entirety of your comment but thought I’d point out that milk is, indeed, a product the market for which is very frequently hampered. The most common form is not an ordinary cartel, which would be illegal, but a cooperative (or series of such) whose main aim (long successful in many places) is to pass and maintain legislation through which individual states engage in the price maintenance of their states’ dairies through a minimum pricing scheme. In essence, the differential operates as an “import duty” or tariff on the product of other states, something that would violate the Constitution if done directly. (The same might well be said of sales tax differentials between some states.) Cases of the type have been raised but have all been settled by the Supreme Court in favor of the individual state interventions.

Between that reality, the commerce clause in the 10th amendment, and the bulk of case experience with eminent domain, it’s pretty clear that the boss really is the boss and that freedoms are merely those it finds relatively convenient or not worthwhile usurping–for the moment.

gene berman September 22, 2008 at 8:32 am

Mark Thornton:

While I’m in very general agreement with what you’ve written. I’d disagree substantially with your ultimate conclusion.

While it’s true that there could be great improvements by trimming back the monetary powers of the government, the ultimate element of coerciveness lies precisely in the idea that the government, any of its branches, or even some portion of the people (a majority, for instance) has any business whatever in defining what is or is not money, establishing or regulating the “value thereof,” etc., or decreeing one or another to be “legal tender for all debts public and private.”

Give me a pen and license to strike about a hundred words from the Constitution and replace them with about as many others. That’s all it would take to eliminate most of the ills, prevent all bubbles and monetary crises of the future, and (probably) induce most of the world to follow suit. And neither word–”gold” nor “silver” would be among the hundred or so words I’d use.

gene berman September 22, 2008 at 8:44 am

Mark Thornton:

One other thing that might have been profitably added to your piece (and of which you might want to make note, since your piece is certainly of a type worthy of forming the base of lengthier treatment).

The plain fact is that each “fix,” no matter how well it works and no matter how well it serves to eliminate whatever specific shortcoming(s) had been responsible for the previous crisis, simply makes the entirety that more vulnerable to even larger crises in the future. There’s no rule or law that says that later crises shall be larger–but that is still a generality to be expected (along with the length of time since the last being some indication that “one’s a-comin”). There simply is no such thing as an invulnerable balloon.

gene berman September 22, 2008 at 9:05 am


Your right–but not properly focused.

The plain fact is, that without government (which means coercive) regulation, there WOULD be private regulation, even though that “regulation” might consist only in a lesser number of individuals willing to enter or participate in a particular market or activity (in which case the regulation would be through that of individual behavior).

From both the economic and the libertarian perspective, government intervention is required (and only possibly beneficial) in proscribing certain acts (force, fraud, etc.) and, even in those cases, only where actual physically coercive measures are required to achieve cessation of the proscribed activity or its punishment. If someone backs out of an agreement to buy your house after passage of an allotted period, he gets punished by you keeping his deposit: an eventuality he’d recognize right from the start.

Chris September 22, 2008 at 11:01 am

Michael Rozeff wrote an article on LRC today that focuses on the illusion that our problems stem from the free market:


Stanley Pinchak September 23, 2008 at 2:06 pm

gene berman,
unless you shackle governmental spending with the chains of the gold standard and enforcement of contract through fraud torts, there will be no end to the business cycle. The government will always favor its position as debtor by maintaining a policy of inflation and credit expansion to reduce its burden and allow for deficit spending. Hollow words on parchment are no substitute for the physical limits of gold and silver draining from the state. The greatest check on state expansion is the unpopularity of tax based financing, the only long term option for states on a gold standard.

In regards to regulation, no governmental entity will perform the job with the same diligence as a private insurance and ratings entity which places its own assets in addition to its reputation on the line (the ratings agencies in this crisis had too small of a financial stake in their false pronouncements). If private certification and accounting is to be established in replacement of flawed governmental regulation, I would anticipate that the resulting system would look somewhat like the UL with regards to electronics. In order to display the mark of a reputable certification agency, a bank would have to obtain insurance on its assets and liabilities. The two would have to balance in value and in maturity. The insurance company would have great incentive to ensure that its risk was truthful and could require more of the bank, voluntarily, than the government could while at the same time not looking like the fascist state.

I don’t understand why the public at large feels that the government regulation is their salvation. Observation proves the opposite. For governmental regulation to work, wholesale socialism would need to be implemented, including governmental regulations and accounting of every aspect of the financial system. This is naked authoritarianism. This can only lead to situation worse that at present. Every step in the direction of socialism is a step towards destitution.

David Shafer September 23, 2008 at 3:06 pm

It is the government (ie citizens through their legislatures) role to set the rules in which industry labors under. It is industries role to satisfy investors and consumers as best they can within the rules set upon them by the citizens.

What the libertarians miss is the facts of history about the rules. When the rules aren’t present, industry is free to behave any way it wants to. There is no moral imperative for industry beyond investor returns. Hence, citizens upon seeing how they behave amend the rules. When you have children as young as 4 working dangerous jobs and getting routinely maimed, for example, citizens make rules about child labor. Do you blame industry for doing what it is suppose to do (give investors maximum returns)? No. You just change the rules so this behavior stops!

Now as to this bailout, as long as they played within the rules then no one should be concerned with their results. However if allowed to fail and bring with them increase unemployment, business and personal failure, you better believe that the citizens would demand and receive more rules.

This bailout is about Wall Street avoiding more rules. As libertarians you should applaud this, not from a purity perspective, but from a practical perspective.

gene berman September 29, 2008 at 9:13 am

Stanley Pinchak:

There’s no essential disagreement on these matters between us except one–reinstitution of the Gold Standard.

I’m agin it–but not for usual reasons. Actually, I’m as solidly for gold currency as anyone of whom I’ve heard or read; nothing else has even a remote prospect of providing a long-term solution to the recurrence of monetary crises.

But, at risk of seeming a “loon” of one or another sort, I must insist that the Gold Standard has had ample opportunity to prove its excellence and has, repeatedly, failed “in the clutch.” This is not evidence of some fault of gold in serving as the primary commodity of indirect exchange; rather it’s simply that the ‘standard” is no guarantor of its observation: if I were just a bit more waggish than I actually am, I’d not call it the “Gold Standard” but the “Gentle Gold Suggestion”—OK when authority likes observing it and dispensable when it doesn’t. I need no more proof of my assertion than plain facts: we’ve been on the standard several times interspersed by authoritarian abrogation (without mentioning that, in one fell swoop, authority physically comandeered virtually the entire stock of the metal from its citizenry). There’s a saying about the credulousness that must accompany repeating a failed attempt in expectation of a differing result. I won’t belabor the point nor minimize the knotiness of the problem to be solved: after all, it baffled Mises himself.

The “fault” (in the structural sense) in the system is the concept of “authority” in matters monetary. I am of the belief that the fault is a very ancient one, possibly antedating recorded history. And, whereas most monetary theorists and historians posit “usurpation” by rulers from money’s origin among people (discounting the belief money was a creation of rulers themselves), I incline to the belief suchauthority developed “t’other way ’round,” being thrust by people on the (not-so-unwilling) rulers in expectation of significant procedural advantages not inherent in either the commodity nor its multiplicity of forms. And, the plain fact is that, for the most part, it worked. We can’t fault ancestors in the dim recesses of history for not foreseeing problems which wouldn’t occur in the main for 4-5000 years and whose solution required not only non-existant economic insight but undreamed-of technologic development.

I have “a” solution to the problem. It’s still in my head, where it’s been for over 10 years. It’s so different from those advanced by others that I can’t state confidently that it is even possible, while, at the same time, I’m certain that, if known, it would be vehemently (and possibly violently) opposed by every existing government, since, at its structural core is elimination of the very concept of “monetary authority,” including “legal tender” laws, etc.

I am making desultory (being naturally lazy and inclined to contemplation rather than action as well as under the necessity of earning aliving) attempts to bring my ideas to the attention of those who might be not only inclined to their careful, economically-informedand intelligent consideration but have certain attributes necessary toward implementation (which narrows very sharply the set of potential collaborators.

That’s about it–except for one point. My motive in this matter is to avert (what seems to me to be) the inevitable consequence of further development and intensification of present systems: monetary collapse of such proportion as to leave hardly an individual–almost anywhere on Earth–unaffected. I can’t envision such occurrence as causing death of less than 60% or more of the world’s population–of starvation and other privations in a matter of weeks following but, also, further disintegration of the interdependent production and distribution apparatus and regression to primitive barbarity and predation becoming a principal mode of survival, i.e., the end of civil;ization. Groups that might be relatively unaffected would be primitive, at least semi-agrarian, and so isolated as to not be worthy of the predatory attention of others. Not tomorrow, the day after, nor even, likely, in my lifetime. But I do see (besides inevitability under current and similar regimes) the possibility of such occurrence in the lifetime of some now living (which includes my children and grandchildren).

In the system I envision, though there’d be no Gold Standard and governments could print (or otherwise create) as much “fiat” money as they’d like, gold would be money universally and governments everywhere would have an intense, overiding interest in restricting “fiat” to some entirely “proper” quantity. To cap it all, I’ve devised a method by means of which the system “pays for itself” without need of diverting gold to the costs of its production (seniorage). Not exactly “something for nothing,”—but pretty damn close.

newson October 17, 2008 at 11:51 pm

to gene berman:
sadly, i agree with you about the wrong-headedness of legislating gold as money (though i am a gold-bug).
i do, however, believe that government (or some private standards entity), should enforce standard weights and measures. this has both logical sense, and a rich tradition (i think the evil of crooked balances is mentioned numerous occasions in the three great monotheistic religions).

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