Wise words from George Akerlof:
GEORGE A. AKERLOF If you let your toddler out of her playpen, you need to watch her more carefully. This wisdom is known by every American parent but has been systematically ignored in economic deregulation. For example, in the 1980's, savings and loans were given greatly expanded freedoms. But in misguided zeal for deregulation, regulatory budgets were cut, not raised. Enterprising individuals found ways to loot the savings and loans for their own gain. Taxpayers, as the ultimate guarantors of deposit insurance, were left holding the bag.
Californians also learned the lesson of the playpen in their experiment with electricity deregulation. Regulators fell asleep on the job; amid blackouts and skyrocketing prices, energy producers and traders manipulated the market.
Over the past generation, financial deregulation has increased the scope for financial mischief. Also, increasingly complex financial derivatives have reduced the transparency of corporate accounts, making mischief harder to track. We must revise our accounting codes accordingly and shore up the regulatory agencies, especially the S.E.C., which have been starved of funds for so long.
Now is the time to remember the lessons of the playpen: increased scope for action must be accompanied by increased regulatory oversight.
