How to Avoid Regulation: Smart Regulation

Every economist agrees that regulation has the potential to stifle economic growth. But every economist also agrees that we need regulation to make markets efficient (and relatively stable).

Given those two givens, free-market advocates should be jumping into the fray, proposing smart, targeted, easily manageable, surgical regulation, that obviates the need for heavy-handed, clunky, hard-to-manage regulation.

My favorite example is regulation of ratings agencies–making it illegal for them to accept money from issuers of the securities they're rating, or at least requiring a cigarette-type warning on each bought-and-paid-for, collusively prepared rating.

It's relatively easy to administer and enforce, and while it blows a hole in today's ratings-agency business model (as it should), it creates a market for objective, accurate ratings that actually have some value.

The effect of accurate ratings would ripple and amplify up the food chain, making it difficult or impossible for mortgage sellers to profit by pawning off mis-rated risk.

One type of regulation that this might preclude: federal rules for mortgage factories, who are currently regulated only (and only lightly and erratically) by the states. Even those who believe in the (potential) efficacy of government regulation should blanch at the prospect of such a federal regulatory bureaucracy.

Government is not the problem. Bad government is the problem. Good government is the answer.