Hesitate to regulate global exchange

Alan Greenspan identifies the inevitable ignorance of regulators. Recall Gary Banks’ advice to consider all public policies as ‘experiments‘.

“[The United States’ 2010 “Dodd-Frank” financial regulation law] fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008. The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971.

In pressing forward, the regulators are being entrusted with forecasting, and presumably preventing, all undesirable repercussions that might happen to a market when its regulatory conditions are importantly altered. No one has such skills

The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems. Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s ‘invisible hand’ that is unredeemably opaque. With notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates.

In the most regulated financial markets, the overwhelming set of interactions is never visible. This is the reason that interpretation of contemporaneous financial market behaviour is subject to so wide a variety of ‘explanations’, especially in contrast to the physical sciences where cause and effect is much more soundly grounded.” Extract from Alan Greenspan in the Financial Times

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