Those who argued for deregulation contend … that the real cost of regulation is the stifling of innovation. The sad truth is that in America’s financial markets, innovations were directed at circumventing regulations, accounting standards, and taxation. They created products that were so complex, they had the effect of both increasing risk and information asymmetries.
When there are important agency problems and externalities, markets typically fail to produce efficient outcomes—contrary to the widespread belief in the efficiency of markets. This is one of the rationales for financial market regulation.
Economic euphoria has been around since Tulip Mania in 17th-century Holland and the ...