Free Market v. the Government?

Every once in a while, I am rather bemused by seeming contradictions. It was not so long ago that the entire financial system in the U.S. (and the world, for that matter) came to a halt because liquidity in the market dried up. Do you remember all the sound-bite in the news explaining to the mainstream what that means? Everyone was trying to explain why it was such a crisis and how we could enter into another Depression. The government took unprecedented steps by pouring money into the system, watching what letting Lehman Brothers fail do to the financial system, "bailing" banks out, and today, we hardly remember the panic that we felt.

So now that the crisis passed, banks don't want the government to regulate them. What's ironic is that when the banks were in trouble, they wanted the government to step in and pump the "financial system" back up. I attended a telephonic continuing legal education during that time, and the speaker was a financial consultant (don't ask how that constitutes continuing legal education). The presenter was absolutely adamant that the government had to step in because the market was in such systemic failure, that there was no way market could have corrected itself to get out of the crisis.

It turns out, that the free market may not be perfect in practice. Adam Smith's invisible hand may not guide the system away from major pitfalls.

So what would be wrong with allowing government regulation so that we can avoid such catastrophic financial crisis? There's the bureaucracy argument. And then there's the whole shouldn't capitalism mean free from the government intervention argument.

At the end of the day though, maybe it's not about having more or less regulation. Maybe it's about societal values and attitude. During the same time period when American financial institutions were getting inventive in creating "derivatives," "credit swaps," and a whole bunch of mechanisms to be called "securities" to work in a way that basically would allow no one to have incentive to take responsibilities, Canadian banks did not march down the same path. In case you forgot, while the rest of the world, modeled after American financial system, fell into the same crisis because of such exotic financial instruments, Canadian banks were the ONLY banks that did not need to be bailed out by its government. Why? Is it stricter regulation? Maybe it's the people that run those institutions and their attitude of taking the "conservative" approach of not investing in exotic instruments that didn't smell right. And maybe they decided that securities should be understandable and transparent... and those responsible for paying or investing, should remain responsible.

But that's just my guess (and guessing from what Canadian bankers said in the news around that time, that their culture is different). If people want to find loopholes, it does not matter how much laws or regulations are in place... loopholes will be exploited. If people want to play it straight, then it doesn't matter that there aren't additional regulations.

So at the end of the day, maybe the question isn't should the government regulate the financial institutions more. Maybe the question is how do we change the attitude and value of people running the system. And that may be a harder question to answer than imposing regulations...