- The Washington Times - Tuesday, June 16, 2009

ANALYSIS/OPINION:

To borrow Niall Ferguson’s metaphor — if finance is an evolutionary process, then regulation is its intelligent design — a cognate of faith, not science.

Or, to take the observation of former Federal Reserve Gov. Frederic S. Mishkin that “the financial system [is] the brain of the economy,” then, I would suggest, heavy regulation is its lobotomy: While it removes the emotional highs and lows, it also dulls the perception, facility and adroitness. (Disclosure, In keeping with my long-held public view: I give professional advice to financial institutions seeking low regulation and taxation.)

A century ago, medical science had faith in lobotomies. Today, it would seem Washington political science has faith in new financial regulation.

Medical science began to gain wisdom when it learned what previously unrealized damage it caused when it lobotomized a human brain. We must hope the experts today who are drafting new regulations by which they would impair our financial system may soon gain wisdom by recognizing how little they understand the effects of these new regulations on our economy’s future health.

However, the current financial regulatory efforts in Washington may not even deserve the honor of being compared to intelligent design or a lobotomy. At least with those two processes, each has the intellectual dignity of an internal logic (even if those logics do not accurately describe the reality they attempt to explain and manipulate).

Rather, the current likely financial regulatory efforts have an almost random nature to them as the legislative log-rolling is collecting unrelated and sometimes inconsistent ideas that eventually will be called, I assume, the Frank/Dodd Comprehensive and Rationalized National Financial Redemption Act of 2009.

The final bill will be the compilation of the results of various political battles being fought among the president; his various White House economic and political advisers; the Treasury; various powerful committee and subcommittee chairmen in the House versus their equivalents in the Senate; the successful interventions of various interests; the institutional partial victories that will be gained in the current battles among the half-dozen or so existing, overlapping financial regulatory agencies; plus whatever the whimsical effects will be of the backbenchers, the states, the commentators, the media and, of course, the public.

Even if the 10 smartest financial regulation experts in the world got in a room and wrote an internally consistent set of regulations, if history is any guide, it would not be likely to anticipate, avoid or mitigate whatever the next financial crisis would be.

As Mr. Ferguson wrote in the “Ascent of Money,” “It seems that, for all our ingenuity, we are doomed to be ‘fooled by randomness’ and surprised by ‘black swans.’ ” (See - and read - Nassim Nicholas Taleb’s two intriguing books: “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” and “The Black Swan: The Impact of the Highly Improbable.”) According to a study of the historic financial data of the past two centuries, there is a 3.6 percent per annum probability of a financial disaster or, statistically, a 100 percent probability of a new financial disaster within 33 years.

Treasury Secretary Timothy F. Geithner - who is the lead executive-branch figure designing new regulations to protect us from the kind of systemic risk of large institutions failing that we have just experienced and are trying to work our way through, inadvertently captured perfectly the madness of the current Washington moment.

As Mr. Geithner was quoted in Wednesday’s Financial Times: “I think this has been a searing experience for financial institutions across the world. The great risk we’re going to live with for a very long time is that risk aversion remains very high.”

I happen to agree with him and made a similar observation in a column last month. But I wonder when it will dawn on the secretary that he is leading the team designing a regulatory system to protect us from greedy and impetus-excessive financial risk-takers destroying the world economy when, as he himself pointed out, the real next risk is probably risk-averse bankers failing to make even sufficient prudent loans and investments.

In other words, he is designing regulations that will force more prudence and even slower and less circulation of needed money on a system he thinks is already predisposed to be too prudent and too slow and will circulate too little money to keep our economy humming.

Realists like to point out that most generals think they are fighting the last war and thus lose the one they are waging. So today, Washington is busy preparing to protect our future economy — which is likely to be stagnant, weighted down with excessive debt, high taxes, expensive energy, industrial policy crony capitalism inefficiencies and risk-averse — from yesterday’s financial impetuosity and excessive risk-taking. Thereby, we will increase the stagnation, risk aversion and middle-class poverty such habits will cause. Washington isn’t writing a financial regulation; it is weaving an economic shroud.

Tony Blankley is the author of “American Grit: What It Will Take to Survive and Win in the 21st Century” and executive vice president for global affairs of the Edelman public relations firm in Washington.

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