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Love Capitalism? Regulate It.

Richard Berner of Morgan Stanley is marking the one-year anniversary of Lehman's collapse by listing the lessons he learned from the crisis.

A strong and well-regulated financial system should be the first line of defense against financial shocks …. [T]he more free-market oriented we want our economies to be, the more we need official supervision and oversight of our financial institutions and markets. That's because truly free-market economies involve a high risk of business failure, and corresponding high risks to the financial institutions and investors that lend to and invest in those businesses. A key lesson from this crisis is that competition among lenders breeds innovation, but also instability.

The devil is in the details with this sort of thing, but on the level of principles, I like Berner's takeaway: True capitalists regulate.

By Ezra Klein  |  September 8, 2009; 4:29 PM ET
Categories:  Solutions  
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Comments

adam smith knew this, but a lot of contemporary right-wing economists have no clue.

Posted by: howard16 | September 8, 2009 4:35 PM | Report abuse

Capitalism requires the rule of law and competent Government institutions, so the Government should focus on those priorities and stop wasting their time and our resources on all of the public option business type activities that they shouldn't be involved in.

The Government's effort to make healthcare affordable over the past 40 years has been about as successful as their effort to make housing affordable. Why is capitalism being blamed for the fallout of these horrific policy blunders? The Government needs to focus on doing its job and stop trying to make everything affordable and "fair". They just mess everything up. The ref shouldn't play in the game. That will always create a mess.

Posted by: fallsmeadjc | September 8, 2009 4:50 PM | Report abuse

fallsmeadjc, let's spell it out very slowly, ok?

housing markets have busted before without a systemic crisis arising. the reason it arose this time is an unregulated financial sector - the "shadow banks" - was able to play paper games and hide risk until the moment of truth.

we might also note that the current crisis was precipitated by the end of an historically unprecedented run-up in housing prices, so what mess are you talking about? surely not that government was making housing "affordable."

(i'm taking it for granted that you're a serious person, fallsmeadjc, so please don't let me down by typing the letters CRA, ok?)

Posted by: howard16 | September 8, 2009 5:02 PM | Report abuse

OOOh, not the evil shadow banks. What ever will we do? I personally think the shadow banks created the swine flu to distract the public while they replace the members of Congress with hi-tech Japanese robots. They won't even buy American robots!!!

Posted by: fallsmeadjc | September 8, 2009 5:47 PM | Report abuse

fallsmeadjc....wow, you are on a bad trip, dude. As for the government making healthcare unaffordable, what have you been reading? Private hands have messed this up....or are you going to try and blame all of private industry's woes on Medicare?

Posted by: scott1959 | September 8, 2009 6:15 PM | Report abuse

Funny, the "hate capitalism" crowd says the same thing. Imagine that.

Posted by: whoisjohngaltcom | September 8, 2009 6:33 PM | Report abuse

There's a big difference between regulations which create a stable environment for investment and social engineering. What capitalism needs is a strong state which protects against individual rights violations and doesn't regulate favors to some over others, and doesn't regulate to achieve poltical goals.
The feeding trough in Washington D.C. has attracted the worst sort of business people, and has created a government/corporate enmeshment which is killing capitalism. The free market is incredibly adept at self-regulation, so any regulations which are absolutely necessary would be few and simple.

Posted by: mdfarmer | September 8, 2009 7:23 PM | Report abuse

mdfarmer, an actual free market, in theoretical terms, is incredibly adept at self-regulation.

but we don't have free markets, and never will: capital is too powerful and uses its strength to achieve oligopoly.

and oligopolies are not incredibly adept at self-regulation.

what you do seem to mean - perhaps in concert with the non-responsive fallsmeadjc - is that oligopolistic capitalism is capable of going through a boom-bust cycle that takes any a given era's most dramatic excess. that's a different story, and a story i'd just as soon not relive again in my lifetime.

anyhow, regulation constitutes a whole set of things, including a functioning legal system, a functioning banking system, etc., and no, a few simple rules just won't do.

Posted by: howard16 | September 8, 2009 9:40 PM | Report abuse

The problem was not that competition among lenders bred instability. It was that collusion among financial institutions allowed them to take enormous risks, knowing that Uncle Sam wouldn't let the system melt down. The first step in financial reform is to make sure nobody's too big to fail.

Posted by: bmull | September 8, 2009 9:53 PM | Report abuse

"capital is too powerful and uses its strength to achieve oligopoly."

"it" is not monolithic -- yes, I hear this all the time -- I just don't hear why it's a necessary outcome.

Posted by: mdfarmer | September 9, 2009 12:53 PM | Report abuse

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