CHAPTER 2

Why Do We Regulate Finance?

And Do So Over and Above the Way We Regulate Other Businesses?

In this chapter, we look at regulation of financial institutions and how it differs from regulation in other industries.

Introduction: Why Regulate?

The debate surrounding regulation in general, not only of the financial variety, is polarized. There are those who are so suspicious of private enterprise that they believe almost everything should be regulated. Others are convinced that even well-intentioned regulation has such adverse unintended consequences that bureaucratic red tape should be cut to the barest of threads.

Worse than this polarization of opinion is the way prevailing opinion changes over time. During economic booms, when private-sector ...

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