Economic health of the US and world has arrived at an intersection between the good and bad forces of deregulation.
Prosperity of the 1990s resulted largely from a withdrawal, beginning in the previous decade, of governments from commerce. The process was necessary and, on balance, good. Before deregulation, governments stood in the way of the innovation and risk-taking essential to economic progress.
But deregulation has disadvantages, at the bases of which lurks greed.
That's greed as opposed to basic human self-interest.
Greed-self-interest gone amok--motivated the colossal misjudgments behind the dot-com investment spree. It created the Enron Corp. fiasco. It fostered the incest now coming to light between corporations and spin-off partnerships, between auditing and consulting functions of accounting firms, between investment analysts and the companies they analyze.
The list will surely grow. So will regulation. But regulation won't eradicate self-interested behavior and shouldn't try. Governments shouldn't revert to the regulation of the past.
If heavy regulation characteristic of the industrialized world in the 1970s and 1980s had endured, there would be no fewer financial scandals than there are today. The only differences would be that more of the greedy perpetrators would be government officials and fewer would be corporate cowboys.
Even now, deregulation's benefits are solving economic problems.
In the US, a surprising new estimate of fourth-quarter 2001 economic activity shows slight growth. If final numbers sustain the estimate, the economy technically can't be said to have sagged into recession last year.
Furthermore, new data show that labor productivity continues to increase despite the slowdown-recessionary or not-in total output.
These are signs of a durable economy, and economy able to navigate around an investment retreat and trauma of a terrorist war. And they both depend on responsiveness that cannot exist when regulation is heavy.
The biggest remaining economic hurdle-besides lingering terrorist threat-is damage to investor confidence. The manipulations exposed by Enron's bankruptcy and the accounting system's suspected complicity discredit financial reporting in general. Exacerbating the damage is news of another financial institution-Allied Irish Banks-jeopardized by a rogue trader.
Investors have growing reason to wonder what happened to the system of financial controls. Government officials have the challenge of restoring it. They must remember that it is possible to tighten controls without overall reregulation of commerce.
The places to start tightening are those recesses in the financial system where anyone has access to large quantities of other people's money. In both government and private business, that's always where trouble starts.