Regulation of financial markets

Lot's of intelligent people argue these days for additional regulation of financial markets. Former SEC chairman Arthur Levitt, Jr. is one. His op-ed on the subject appears in Monday's WSJ. Levitt argues primarily for more people on the SEC enforcement staff and better risk management.

Fair enough, but is there any evidence that more regulation will do any good. Sarbanes-Oxley has been in effect since 2002 and it didn't stop the financial meltdown that occurred last year. Some would argue it did more harm than good.

Arguably, regulators spread themselves too thin, trying to regulate too much and therefore regulating very little. Levitt argues, for example, for regulation of hedge funds. This would do what? Protect wealthy investors and some banks and mutual fund companies from doing something stupid? Weathy investors can take care of themselves -- they can afford the losses -- and banks and mutual fund companies already are regulated.

Surely everyone will agree that banks, investment banks and nearly everyone else took on too much risk in recent years, and that contributed to the financial meltdown as much as anything. One reason why such risks might have seemed acceptable could be that such risk takers were pretty sure that the federal government would bail them out if push came to shove, which is what is happening. The risk takers might have been thinking that nobody ever fails in the U.S., they get bailed out instead.

Failure is a powerful teaching tool.