George Soros has written an article, The Crisis and What to Do About It.
Since [financial markets] are prone to create asset bubbles, regulators such as the Fed, the Treasury, and the SEC must accept responsibility for preventing bubbles from growing too big. Until now financial authorities have explicitly rejected that responsibility. It is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds.
Soros has made a fortune in financial markets. Last year alone his income (income - not wealth) was nearly $2 billion. Soros fled eastern Europe for free markets but is a critic of what he calls free market fundamentalism.
I mostly agree with and admire Soros. (Okay, maybe even envy him. I'd work at his salary for just a week and be happy with the 30-some million.) I think it is wonderful to have markets and I think that it as silly to think that financial markets will self regulate as to think that football games or or any sports contest will self regulate.
But his words here get to the crux of why regulation is so hard and why it is so much easier to take the extremist positions of free market fundamentalism or socialism.
First of all, who wants a Federal Reserve chairman who keeps asset prices down? It sounds good in abstract, but we're actually talking about home prices and portfolios that we're keeping from appreciating too much.
Secondly, what is the tolerable bounds for a bubble? Don't we all want just one or two more percentage gains - no matter what gains we've already made? Who is to say what is too big? Someone whose annual income is $1.7 billion? Someone who is on a fixed government salary and envies anyone making more than $100,000 a year?
As anyone who has bought furniture at Ikea can attest, just because something is hard is no reason not to do it. Getting the right level of regulation is hard because what makes for best short-term conditions (stability and predictability) can make for poor long-term conditions (innovation and change at the heart of progress).
Soros is saying what a lot of us are thinking. He also seems to raise more questions than he answers. And I think that this is perhaps the biggest reason that free market fundamentalism won converts. It suggests that regulators don't have to make any hard decisions or difficult judgments. They can simply leave it to the market.