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Financial Apocalypse Diavlog

September 18, 2008

There is a nice BloggingHeads episode between Bob Wright and Dan Gross on the recent bailouts and financial meltdowns.

One thing both Bob and Daniel ignored in discussing possible regulatory fixes is that regulators aren’t inherently any better at perceiving potential problems in advance than are market participants. See this post.

Larry Summers has a good discussion of this phenomenon here and Megan McCardle here.

That’s not to say that regulation can’t be done better. Regulations help set the characteristics of market institutions and almost any institution can be made better. But like the work of improving institutions, improving regulations is difficult.

Not that there is any practical alternative, but the task is made even more difficult by the fact that those doing the regulation are government entities, which are subject to popular political pressure and pretty crude incentives to do a good job.

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