Rules to prevent financial fraud or toxic dumping or faulty medical devices — these don’t destroy the free market. They make the free market work better. — President Obama, State of the Union Address, 1/24/12
Over the past year, discussion over regulations has frequently been distortedly one-sided, as if their only possible effect on the economy and markets is to cause damage. The Obama administration itself has often failed to add balance to this conversation, so it was heartening to see the president lay out a more comprehensive assessment in his State of the Union address.
In the address, President Obama focused most on the financial crisis and regulations. He, appropriately, stated that the roots of the economic collapse and ongoing economic troubles included regulatory inadequacy: “In 2008, the house of cards collapsed. We learned that mortgages had been sold to people who couldn’t afford or understand them. Banks had made huge bets and bonuses with other people’s money. Regulators had looked the other way, or didn’t have the authority to stop the bad behavior.”
So the effective implementation of strong financial regulations can not only provide needed protections to individual borrowers and savers, they can also abet financial stability, in all these ways making the free market “work better.”
A fuller version of the President’s claim would also include the following reasons why regulations can help the free market work better and help the economy.