Regulate Perfect Markets? - !

There's a short but interesting post up at Arnold Kling's blog. It is asked whether "imperfect government regulators [can] protect imperfect investors from themselves"? On the one hand it is argued that markets are efficient, which should speak in favor of deregulation. On the other, indications of market irrationality should speak in favor of regulation.

Now, markets are efficient in part because they are regulated: shareholder-elected boards have to disclose information to bondholders, securities-exchanges are centralized to enhance liquidity, banks have to be sufficiently capitalized etc... So it's not that straightforward to claim a link between market efficiency and deregulation. And Bainbridge whom is quoted in the post as speaking for deregulation, says "that it takes a theory to beat a theory". Out in the reality based community, of which Popper should be, I suppose, one of its first members, it just takes some good observations to beat a theory; so one might really wonder what Bainbridge is up to here.

Back to Kling's question about what government can do: Can't even the most imperfect government protect investors from overstating their creditworthiness to each other thereby avoiding repeated overspeculation? I think so and would suggest that self-regulation (not widely, if at all, used in this area today) would either fail or lead to too heavy collateralized positions, i.e. underspeculation.

And I can't refrain from reusing the formulation of the question, let's try each other's political standpoints through it:

Can imperfect government forces protect imperfect citizens from other imperfect government forces? - The conservative would sound an emphatic yes!, personally I'm not that sure.

Can imperfect government forces protect imperfect propertyholders from other imperfect propertyholders forces? - Here most of us agree for once, it seems.