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The invisible hand vs the iron fist
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President Obama unveiled sweeping new regulatory changes for the financial industry today. He spoke of the need for more of the "guiding hand of government" as opposed to the invisible hand of the marketplace.
The "invisible hand" is how Adam Smith referred to the cumulative effect of individual decisions made in a free market, which I often refer to. He made the analogy in his famous book "The Wealth of Nations".
The antithesis to this is the iron fist of government or their "guiding hand" if you prefer. This is allegedly needed because the lack of more regulation has lead to economic calamity.
As I pointed out in this post, the reason lawmakers and corporations alike are quick to blame lack of regulation for our woes is that it lets everyone off the hook. It implies that everything done up to now was legal and that regulators were diligently doing their jobs under current law. We just need more laws. How convenient. No one has to take responsibility for crafting the now infamous mortgage backed derivatives, for approving them or for the decision to invest their banks' depositors' money in them. Everyone starts with a clean slate. Dragging out the usual suspects; lack of oversight authority, outdated regulation, capitalism run amok; is just cover to enable individual con men and women in industry and in government to continue to practice their craft.
It's a good out for the players involved but putting more regulatory requirements on business and trying to remove risk from the marketplace is like putting water wings on an olympic swimmer. Neither the players nor the spectators benefit. It does not make for a better game. If we want to create a vibrant economy, individuals must be held accountable for their actions, by name. Risk must be allowed. Innovation must be allowed. Failure must be allowed and when it comes around, pain must be endured.
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