Forbes
The ongoing financial crisis poses two issues. One is how to clean up the current mess and the second is how to reform the system once the crisis is over.
In regards to the second issue, which in the long run is probably the more important one, calls for a new and tighter regulation are becoming stronger by the day. While there is a legitimate case for more consistent regulation and oversight, such as to reduce regulatory arbitrage, it is less obvious that we really need more or tighter regulation.
Financial regulation imposes significant costs on the economy. For instance, excessive regulation can stifle financial innovation, reduce the flow of credit to worthy firms and consumers, and impede economic growth. Moreover, regulation is not needed to the same degree at all times. In fact, current calls for regulation come at the same time that market discipline is back in full force and more regulatory scrutiny could exacerbate the downturn.
