Tuesday, July 7, 2009

Why Financial Regulation Will Not Work

Please read my letter to the Philadelphia Inquirer. I recommend that you also read a relatively short essay by Wilhelm Ropke in which he explains the consequences of what he calls "repressed inflation". "Repressed inflation" destroys production by attempting to forbid risk and/or to direct investment by political means in conjunction with excessive credit expansion...exactly what all the governments and central bankers of the world are attempting to do now.

Ropke wrote his essay in 1947. Read it here: http://mises.org/story/3492

----- Original Message -----
From: Patrick Barron
To: Editor Philadelphia Inquirer
Sent: Tuesday, July 07, 2009 8:28 AM
Subject: Why Financial Regulation Will Not Work

Re: "Financial overseers in place", by Robert Lam, acting chairman of PA Securities Commission, 7July09


Dear Sirs:
Mr. Lam's confidence in the ability of regulators to spot excessive financial risk should have been shaken during his three decades on the Pennsylvania Securities Commission. During his tenure, we have suffered innumerable financial booms and busts. If vigorous oversight by regulators will prevent such occurrences in the future, why did past regulatory oversight fail? The answer, of course, from Mr. Lam is that financial markets need even more regulation. The real answer is that financial booms and busts are caused by excess fiat money generated by the Federal Reserve System. Once this excess money--generated by the printing press and not by real savings--enters the banking system, nothing can prevent it from doing its inevitable harm of initiating unsustainable business investment. These investments do not appear to be unsustainable at the time, because the Fed suppresses the interest rate. Only years later, when it becomes evident that there exists a deficiency in the factors of production necessary to carry these projects through to profitable conclusion, does it become apparent to everyone that our scarce capital has been misallocated. At that point it is fruitless to attempt to sustain the boom by printing even more money, as our Federal Reserve System is doing right now. All the Fed is accomplishing is the destruction of even more scarce capital. Free financial markets operating under a sound money environment tend toward equilibrium, as explained by Jean-Baptiste Say over two centuries ago. The free market prevents and punishes bad investment more quickly and with less damage than an army of regulators empowered with all the modern tools of financial analysis.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382

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