Another piece that should be posted in every Federal department office and Parliament House.  Tyler Cowan argues that politicisation, not the markets per se, is the root cause of the current financial troubles.  Bad policies, bad regulation and political interference in the market mechanism led banks and organisations such as GM being ‘too big to fail’: they were propped up and protected from market realities.  Further interference is not the solution.

Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

We should stop using political favors as a means of managing an economic sector.

Financial markets are subject to criticality—and so catastrophe and collapse—just as a natural system.  Preventing small failures—including through political favours and protecting interest groups—inevitably leads to more pent up energy and catastrophes.  Good system design allows constant small failures, as in an efficient market.  And even those ‘too big to fail’ must be allowed to fail, naturally—or some means found to bleed off the criticality, and reduce their size—else risk complete catastrophe.