Contracts, Markets, and Laws in the US and Japan
Edited by Zenichi Shishido
Chapter 21: Regulating in the dark
How should one regulate in the midst of a financial crisis? This is a fundamental question for financial regulation, and it is not readily answerable, as the issues implicated are truly complex, if not intractable. Yet foundational financial legislation tends to be enacted in a crisis setting, and over the past decade, when confronted with this question, the US Congress has answered it reflexively by enacting legislation massively increasing the scope and scale of the regulation of business firms, and especially financial institutions and instruments, in a manner seemingly oblivious to the cost and consequences of its actions. By tending to enact comprehensive financial legislation only in reaction to an immediate financial crisis, Congress acts most swiftly precisely when greater deliberateness is called for, given the paucity of information available to produce a high-quality decision. In order to understand financial regulation undertaken in a crisis, we need to take account, as Frank Knight put it, of “human nature as we know it.”
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