Duke Research Advantage

Professor Paul Zipkin argues “regulation is a necessary element of the infrastructure of free enterprise,” in an op-ed published in the Sept. 24 edition of the Raleigh News & Observer.

Defective financial products can ruin lives just as surely as bad food and faulty electrical wires. Just ask the millions of borrowers who can never hope to pay their debts, the thousands of laid-off financial professionals and factory workers, and all of us taxpayers.

The Obama administration has proposed several initiatives to help our damaged financial system. One is the Consumer Financial Protection Agency. The CFPA aims to avoid some of the ill-conceived products, such as tricky subprime mortgages, that have played central roles in the financial crisis. It’s a good idea, and we should all support it.

Bankers too should support this idea, and some do, privately. Publicly, however, the banking industry has mobilized its considerable forces to oppose the CFPA. They argue that it will hamper financial innovation. Well, that’s sort of true – in a good way. Some innovations are valuable but some are not.

All regulations channel economic activities in certain directions, and that means avoiding certain other directions. Most of us are glad to pay a bit more, so that our children are rarely poisoned by food or shocked by electronic games. Furthermore, the food and electronics industries have thrived under safety regulations. Such rules do not stifle innovation. On the contrary, by clearing out unsafe products from the market (and avoiding nasty scandals), they encourage innovation of safe ones.

For example, the Food and Drug Administration was established about a hundred years ago, when worthless and even poisonous medicines flooded the market. By eliminating them, the FDA set the stage for the development of safe and effective drugs, as well as a very profitable drug industry. Likewise, properly deployed road signs and signals smooth the flow of traffic. They also help avoid collisions, which temporarily stop traffic entirely, in addition to killing people.

Of course, people argue all the time about specific regulations. “This rule is too restrictive, that rule is too lax,” they say. But such debate is a normal and healthy part of the process. Regulation is a necessary element of the infrastructure of free enterprise. To suggest otherwise is ignorant, immature and irresponsible.

Opponents of the CFPA have a heavy burden. They need to explain exactly how the industry, left without further regulation, will avoid creating more of the toxic financial instruments that fooled so many homeowners and investors alike, bringing the world’s economy to its knees, and requiring a $700 billion taxpayer bailout (under the Bush administration, by the way).

Bankers will doubtless be able to adapt to the CFPA. Indeed, a stamp of CFPA approval could help the industry repair its deeply tarnished reputation. With a bit of maturity and creativity, bankers will learn to work with the CFPA to find workable solutions to real financial needs. That would be good for the industry, as well as consumers and the rest of us.