Complexity

Over at the Atlantic, Megan McArdle predicts that more regulation is certainly in store for the financial sector — but isn’t sure it’ll do much good:

[T]he broad demands for “stricter scrutiny” and “more transparency” are meaningless…

The problem is not transparency but complexity: The value of the securities was as opaque to those who held them as it was to everyone else. Regulating away the risk of a repeat will involve doing away with much of the complexity that has broadened and deepened US capital markets over the last thirty years. This may be necessary. But one thought should give pause: Many of these complex securities were created to get around previous regulations.

This seems about right to me.  Legislators tend to think that they can do away with behavior they don’t like (in whatever realm) by prohibiting certain actions and methods. But even when the regulation is generally successful at enforcement, such behavior typically manages to find other outlets in which to act out. The trick, usually, is to avoid trying to squash it and instead look for ways to better incorporate it into the system.