Regulation
By newly-enacted federal law, everyone on the blagotubes has to write a post about the ongoing financial meltdown before civilization (and the Internet) collapses, so here’s mine. Of course, since I wouldn’t know a 401(k) from a 386zx, take my uninformed ramblings with a big rock of salt.
I’ve compared free market capitalism to natural selection before. They’re both powerful forces that work surprisingly well and often come up with unexpected solutions to problems. I can metaphorically (and in many neighborhoods, literally) stand on a city street waving a $20 bill and shout “I’m bored/thirsty/lost!” and someone will come along and fix that problem for me, whether by offering me a Coke, a taxi ride, or acts that would make Larry Flynt blush.
It works because it matches up people who want something (stuff) with people who want something else (money), and rewarding those who do it best. But what happens when the interests of the people who want stuff and those of the people who want money aren’t aligned?
Evolution discovered a long time ago that theft is easier and more profitable than honest toil: cheetahs steal nutrients from antelope, who in turn steal them nutrients from grass, which is stupid enough to build its component parts out of chemicals it finds lying around. Grass is a sucker. Is “dumb as a bag of grass” an expression? It should be.
Similarly, if you’re a lost tourist and I have a taxi, I can either offer you a $5 cab ride to your hotel, or I can mug you and take the $80 in your wallet. $5 vs. $80: which is more profitable?
This is why we have cops, traveler’s checks, etc., to make sure that in the medium and long run, it’s more profitable for me to go with the $5 cab ride option.
This scenario plays out on all levels: if a large company makes mediocre DVD players, and a small startup starts selling better ones at the same price, the market will reward the startup by giving it money. The large company has several choices: it can lower its prices; it can improve the quality of its product; it can launch an ad campaign (”Crap is the new black!”); it can buy up the startup and either sell its DVD players or bury the design in a ditch somewhere; it can sell its own DVD players for $1 apiece until the startup goes out of business. Hey, whatever works. And in business as in the wild, often the easiest route to success is killing your competitors.
At this point, we notice that we have a government lying around, and in theory, it should be able to do more than just passing resolutions thanking moms for their delicious pies and filibustering itself into a coma (or is that a surfeit of pies?). The point of having a government is to make life better, and that’s where regulation comes in.
Market regulation helps ensure that the desires of the people who want money are aligned with the desires of, well, everyone in the country. It’s a way of making sure that the “provide high-quality goods and services at a low price” option is more profitable than the “tie the suckers over a barrel and anally rape them” option.
As I said above, I’m dumber than a bag of grass when it comes to finance, but as I understand it, a lot of the blame for the current meltdown has to do with companies doing things that were good for them, but not so good for everyone else. Like lending impossible sums of money to anyone with a pulse, then telling some other company that hey, I’ve got this $600,000 mortgage, and the guy’s totally good for it, but I need some cash right now, so I can let you have it for $300,000 and have I mentioned how much I like your power tie? And then when Mr. Power Tie realizes that he’s been had, and tries to unload the mortgage on someone else, perhaps convinding a futures trading firm that a mortgage is just like playing The Sims for real money. And eventually, the music stops and everyone scrambles for a chair, only to find that all the chairs have been bought up by new homeowners with their subprime loans.
So regulation is a way of channeling the power of the market so that it goes in the direction we want, and to erect dikes and levees so that a collapse in one area of the economy doesn’t affect other areas. The problem is doing this wisely, without causing even bigger problems, and without stifling the power of capitalism in the process. And I have no idea how to do that.
But I would like the eventual solution to include pillories, so we can laugh at the people who made irresponsible business decisions and throw rotten vegetables at them.