Glenn Reynolds makes this observation about the call for greater regulation in financial markets:
There is an argument, instead, for crunchy systems where problems are immediately obvious, instead of “soggy” ones where they are not. Regulation, etc., tends to make systems more soggy — which is good for you when FDIC insurance protects your savings, but bad for the system when FDIC insurance makes you not care about your bank’s balance sheet or loan portfolio.
A complexity is that even when we know there is a problem it doesn’t mean we know what to do about it. Our bodies seem more crunchy than soggy in this respect, and the easy availability of health care for the slightest perceived difficulty has had some negative consequences. The root solution seems to be more education so that we can learn to recognize and evaluate symptoms, as well as determining possible wise courses of action.
Such an education would not be merely in content – how to recognize bubbles, how to tell when a pitchman for a particular investment is telling the truth, how to evaluate companies or the prospects of various commodities – but also in attitude. If we hear, “The market lost 10% of its value today,” how ought we to feel? Should we panic? Should we rejoice because we now have a buying opportunity?
Surely a recognition of the need for more education is no quick fix – if it’s even possible. Perhaps the least we could hope for is education for some of our leaders. What would it look like if congress and the rest of the political class didn’t go off the deep end (“Institution X is about to fail!” “The other party has put us in such a mess I don’t think we can recover apart from drastic measures!”). Sometimes the utterances we hear when they go off the deep end are factually accurate, but the rhetorical strategy employed creates more panic than calm. My perception is that people more usually do the right thing when they’re calm than when they’re panicked.