Abstract

In response to the Great Depression, the United States introduced mechanisms of banking supervision and securities regulation designed to combat bank failures, limit contagion in the event of failure, and prevent abuse of consumers. In 2008, America’s largest bank and largest insurance company, along with many other financial institutions, required rescue by the US government: the following year, Bernard Madoff turned himself in to the FBI, confessing to the largest financial fraud in history. In the meantime, the principles of regulation      
espoused in the United States have been imitated around the world, notably in Europe, and the scope and intensity of regulation have increased steadily.

How could such an elaborate regulatory apparatus have failed so comprehensively? How could we have got it so wrong? And is there anything we have learnt, or could learn, that will make the future different from the past? The answers lie in bad economics, in neglect of the social and political context of regulation, and in wildly unrealistic expectations of what economic regulation can be expected to achieve; and the solutions in realistic reappraisal on all these counts.