While discussing government regulation with Gerri Willis on Fox News on Tuesday, anchor Shepard Smith noted that there are more government regulations than words in the English language and implied a proper skepticism about the value of such onerous regulation.
He then said — in a rather odd tangent — that the derivatives market is essentially unregulated and that it is “bigger than our entire economy…times three.”
Instead of reaching what I would have thought to be the obvious conclusion, namely that regulation stifles growth, Smith lamented that “we have no control whatsoever” over derivatives trading.
If one looks at the recent financial meltdown, there is precious little evidence that the unregulated sector of the financial markets played a starring role. Instead, what crushed banks, markets, and the economy was perhaps the single most regulated part of America’s financial tapestry: banking and mortgage banking. Papers and books can be and have been written on this. More broadly, government entanglement in private business (which is what most regulation in the financial sector is), destroyed any ability for a “free market” to function (not that we’ve had anything particularly close to a free market in banking even before the 2008-2009 bailouts, TARP, etc) and destroyed the public’s belief that there is a functioning market. (See this interesting paper by Bruce Yandle on the topic of “Lost Trust.”)
Beyond the fact that a large part of the derivatives market is in fact highly regulated (such as everything that trades on every options or futures exchange), Smith’s observation that the unregulated portion of derivatives trading dwarfs most other markets is a clarion call for reducing regulation elsewhere, not increasing regulation in a sector which has served the nation and world admirably, even if not flawlessly, for many years.
I would suggest that Shepard Smith reconsider the lesson to be learned from the success of largely unencumbered markets such as derivatives or the Internet, versus the outcomes from the highly regulated sectors of our economy, such as mortgages and health insurance. After all, which sectors — the highly regulated or the lightly regulated — do you think have happier employees, happier customers, and more opportunity to provide jobs and profits for American workers and investors?
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