When the cat’s away, mice will play. Humans, too, can drift into economic bedlam, when regulators are either absent, powerless, or just napping. The implosion of the American banking system has prompted suggestions for drastic remedies in regulation. Timothy Geithner, the US treasury secretary, demanded comprehensive reform on March 26, calling for, “not modest repairs at the margin, but new rules of the road.”
Arguments will focus on how far the system should be overhauled, and whether new draconian regulation might even impede economic recovery or stifle innovation. Yet financial engineering has made giant strides in recent decades. Innovative vehicles for dispersing or transferring risk, and enhancing profits moved so quickly that old-style regulation was left in the dust. So even without the bolt of the 2008 crisis to spur action, America was already overdue a regulatory overhaul.
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