The premise of the current financial regulatory reform is that the
establishment missed the last bubble and, therefore, more power should
be vested in the establishment to foresee and prevent the next one.
reasonable. It would force derivative trading out into the open. It
would create a structure so the government could break down failing
firms in an orderly manner. But the bill doesn’t solve the basic
epistemic problem, which is that members of the establishment herd are
always the last to know when something unexpected happens. If this were a movie, everybody would learn the obvious lessons. The
folks in the big investment banks would learn that it’s valuable to
have an ethical culture, in which traders’ behavior is restricted by
something other than the desire to find the next sucker. The folks in
Washington would learn that centralized decision-making is often
unimaginative decision-making, and that decentralized markets are
often better at anticipating the future. But, again, this is not a Hollywood movie. Those lessons are not being
learned. I can’t wait for the sequel.