Regulation is required

The False Dichotomy between Banking Honesty and a Sound Financial System

By William K. Black

“It’s exceptionally hard to kill bad ideas. The most spectacularly bad idea in economics and finance is that regulating business honesty is bad for business. The idea is exceptionally criminogenic. The idea ebbs briefly after each epidemic of control fraud it unleashes leads to crisis and scandal, but it quickly returns and intensifies. The bad idea has grown for three decades, which is why we have suffered recurrent, intensifying financial crises. Both major parties’ dominant economic policy makers embrace this bad idea…

The bad idea that rules designed to reduce business dishonesty harms business is premised on a false claim that markets automatically exclude fraud. Alan Greenspan is the most famous anti-regulatory who once held this view. He has, subsequently, admitted his shock at the financial fraud that defined the current crisis. He admits that his belief that markets automatically self-corrected by excluding fraud proved false. Frank Easterbrook and Daniel Fischel (1991) are the most famous proponents of the view that markets automatically exclude fraud: “a rule against fraud is not an essential or … an important ingredient of securities markets.”

The idea that markets automatically exclude fraud is absurd and would be conceivable only to people with no concept of human nature.

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