A Chequer-Board of Nights and Days

Steve Chapman demolishes them. His context is the Bernie Madoff scandal, but really, his words apply in a much more macro sense:

. . . Advocates of stricter regulation often talk as though the choice for protecting investors is between imperfect market mechanisms and foolproof government regulations. In fact, governments, like every other institution, are staffed by fallible individuals who can be fooled as easily as anyone else.

The call for more federal control overlooks inconvenient facts. The first is that con artists will often outfox regulators, if only because they have far more to gain from carrying off a fraud than civil servants have to gain from stopping it. If the SEC couldn't catch the brazen Madoff in eight tries, what suggests we should place greater faith in the ability of other agencies trying to monitor a vast network of financial companies?

Banks have been decimated by their purchase of mortgage-backed debt that has gone bad. But banks operate in one of the most heavily regulated sectors of the economy. The call for more intervention assumes that if one aspirin won't cure a case of pneumonia, two will.

And if America's weird aversion to regulation is the problem, how come banks in government-addicted Europe are in the same hole? "By some measures, in fact, European banks exposed themselves to even higher levels of risky debt than American banks did," the International Herald Tribune reported in October.

Federally imposed rules are no match for a mass outbreak of reckless abandon, and they're no substitute for individual prudence. A new burst of regulation would eventually confirm those truths, but the mess we're in should be lesson enough.

Something to remember in the coming debate over regulatory policy. And it is up to us to remember it. After all, the "reality-based community" will either be determined to forget these lessons entirely or will shut its collective eyes and ears and not learn them in the first place.