A Useful Analogy (Hindsight is 20/20)
Ha-Joon Chang, in his book 23 Things They Don't Tell You About Capitalism, makes a case for increased government regulation of the financial sector, despite the logic that "the government does not know better than those whose actions are regulated by it . . . the government cannot know someone's situation as well as the individual or firm concerned" and so "government officials cannot improve upon the decisions made by the economic agents," but he explains that regulations often work not because the government "knows better," but because the regulations limit complexity, and of course this applies to the sub-prime mortgage crisis, where the financial instruments and derivatives were more complex than the experts and investors could predict, and Chang makes this useful comparison: when a company invents a new drug it cannot be sold immediately . . . first the drug needs to be rigorously tested on carefully monitored patients because the interactions of a new drug in the human body are complex and unpredictable, and it will take a while to tell if the new drug has more positive benefits than its side effects . . . and, of course, this was not done before we sold unregulated sub-prime mortgages, packaged them into mortgage backed securities, packaged those into collateralized debt obligations, and insured those with credit default swaps . . . and it turns out the side-effects of this financial treatment are nausea, irritability, unemployment, mental confusion, erectile dysfunction, depression, problems sleeping, constipation, diarrhea, kidney failure, hostility, hallucinations, canker sores, foreclosures, and panic attacks.