Two Cheers for Deregulation

So regulation is not always a bad idea after all.

On Friday, her last day in office, Janet Yellen told Wells Fargo management that cheating millions of consumers has consequences. The bank that opened fake accounts, overcharged for auto insurance, and in other ways ignored the consequences of the incentives built into its bonus scheme has been fined and told to shake up its sleepy board. Most important, Wells Fargo will not be allowed to grow its business until it satisfies the Fed that its house is in order.

Few would quarrel with her decision, least of all Jay Powell, her Trump-appointed successor, who voted with Yellen on Friday. And even better, Yellen, not a cheerleader for Wall Street, took to the television studios to state with justifiable confidence that the downward lunge of the stock market did not create a threat to the financial system because of the strong capital positions required of the banks by—yes—regulators and their much-derided stress tests.

And deregulation is not necessarily a good idea everywhere and at every time, and the crowd cheering anything that bears that name might want to have a re-think. Yes, Trump has done a good job of cutting through the nightmarish web of regulations Barack Obama spun to control American industry. The business community no longer must wonder each day what the government plans to do to it. Good thing.

But jumping to the conclusion that all regulation is a bad thing makes no sense. When markets fail to reflect the costs imposed on society by the production and consumption of a good or service, and taxes are a politically unobtainable corrective, we need the long arm of government to supplement the invisible hand.