March 27, 2008
Meltzer on Financial Regulation
Arnold Kling
Regulators and most politicians are good at developing rules and restrictions, but poor at thinking about the incentives that the market will face. If the incentives are strong, the market circumvents the regulation. The Basel regulation encouraged a system that is far less transparent than the system it replaced.
Read the whole thing. Spend some time thinking about it.
The naive assumption that people make is that regulation will work exactly as intended. This assumption is always incorrect, often by a wide margin.
Separately Meltzer grades Bernanke. On the Bear Stearns intervention, Meltzer and I are on opposite sides. Thanks to Greg Mankiw for the pointer.
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