The Democrats' Regulatory Solution

From the beginning of the financial crisis of 2008 Democrats blamed "deregulation." Without the proper regulatory safeguards greedy Wall Street bankers made risky loans and hid their losses in off-balance sheet shenanigans.

Never mind that the regulators were found to be asleep at the switch.

So their solution is Dodd-Frank, a 2,300 page bill of financial re-regulation that will, according to the Wall Street Journal edit page, require 243 rule makings from ten different government regulators: FDIC, the Fed, the Treasury, etc.

On the same day, libertarian John Stossel complained that we've become a "nation of a million rules."

Not the kind of bottom-up rules that people generate through voluntary associations. Those are fine. I mean imposed, top-down rules formed in the brains of meddling bureaucrats who think they know better than we how to manage our lives.

Yet the US Congress and the Obama administration have faith that all those bureaucrats are going to look up from their rule-makings and come together to stop the financial king pins from folly when the next big boom comes.

The great illusion of our age is the faith in rules. It's natural, of course, because we have demolished the old system, the penumbra of culture that stopped people from violating the rules. In the old days of face-to-face community people had a sense of shame and obligation. They had an invisible dog fence. They didn't need a real fence to control themselves.

The less admirable side of our culture of rules is that is pure politics. Our modern governments use the financial system to give government a cheap source of credit, and to hand out subsidies to favored supporters. Inevitably, this process gets out of control. Fannie-Freddie started out as a way of spreading mortgage risk in the depths of the Great Depression. It ended up as an out-of-control program, cheered on by politicians like Sen. Chris Dodd (D-CT) and Rep. Barney Frank (D-MA), that sprayed trillions of dollars of mortgages at people who couldn't even afford a down payment.

The great task of conservatives, after the current regime has sunk into failure, will be to revive a workable capitalism. It must be built on trust and character, not bureaucratic rules.

The new economy must have less debt. It must be fail-safe enough not to need elaborate regulatory groins and breakwaters. And it must keep the politicians and the activists at arms length.

That's a tall order. But it is essential. Capitalism is too important to be left to the bureaucrats and the politicians.