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What level of governance is desirable?

October 14, 2011

I was reading recently about the financial crash and the author was suggesting that far from too little regulation, the problem is that we have too much. He suggested that much of the governance and regulation in place today is a pretense by politicians that they have things ‘under control’. It is a reaction to events that actually increases systemic risks by creating a false sense of security.

There is certainly some truth in this view. A framework of governance and regulation generates a sense of underlying confidence that reduces the diligence with which situations or decisions are reviewed. That certainly appears to have been true in the financial services industry. If there had been no regulatory framework, would people have had such blind faith in the actions of the industry?

The truth is that you cannot regulate desirable behavior. There are always conflicts between short-term and long-term interests, between personal and social benefit. Certainly we nee d to protect against criminal activity, but we also need to remain skeptical and ask questions about motivation and representation.

This is true in any form of governance system – including the world of contracts. And, as one colleague pointed out recently, rigorous process often causes us to spend more time and effort on getting through the process than we do on assessing the risks that were the underlying reason for the process.

  1. wrdforwrd permalink

    I must respectfully disagree with the notion that the financial crash was due to “too much” regulation. That’s a message strait from Wall Street. Many economists and politicians know that the lack of regulations and ineffective enforcement of what few regulations were in place (largely ignored anyway) directly led to the crash and made it worse once it started. There was no effective braking mechanism to stop the disaster once it got rolling.

    • I am inclined to agree, but there are some interesting points from which we should learn:

      1) There should be a balance between ‘the rules’ and personal responsibility to think and take care. By regulating, we actually encourage risk taking (eg by the banks) because there is then an obligation for the state to step in and protect people when things go wrong.
      2) Politicians like to pretend that they have things under control. But the truth is, they do not. They did not have the information or understanding necessary to protect against the financial crash, not least because today’s global political system was simply not designed to handle world trade in its current form. And it still isn’t – which is why we are back on the roller-coaster that they pretended they had fixed 3 years ago.

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