Perhaps what the savings and loan and now the broader financial-industry crises reveal is the danger of partial deregulation. Full deregulation would entail eliminating both government deposit insurance (especially insurance that is not experience-rated or otherwise proportioned to risk) and bailouts. Partial deregulation can create the worst of all possible worlds, as the western energy crisis may also illustrate, by encouraging firms to take risks secure in the knowledge that the downside risk is truncated.
This is an important observation that a lot of policy debates miss. What is often percieved as market failure is really government induced market failure. Big pharma, for instance, is often accused of abusing market power. The truth is the drug industry is far from perfectly competitive and this has a lot to do with the way government intervenes in health care.
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KLR didn't suggest that regulation is inherently a market failure in its own right, so this is not a response to the post, but simply an addition.
Posner certainly thinks that partial regulation is the problem-- or at least poor attempts to locate socially optimal regulation (politically/ideologically motivated, often). But, importantly, he doesn't favor deregulation. In fact, in his view "the correct approach is to carve down regulation to the optimal level but then finance and staff and enforce the remaining regulatory duties competently and in good faith." I only point that out in case it appears that Posner would eliminate financial regulation altogether given the opportunity.
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