For months now, people have been glorying in the supposed failure of the free market and how lack of regulation got us into our current dire predicament. However, let’s not be too hasty. Regulation is imperfect and can often cause more problems than it prevents.

What we have here is a failure to regulate?
Everybody’s howling about free market policies bringing us to this, but they’re ignoring the argument that Federal Reserve policy is very much at fault. There’s nothing purely “free market” about the Fed’s tinkering with monetary policy.

The Fed under Alan Greenspan created a massive bubble. Basically, we experienced way too much “boom” and the idea that we could constantly borrow our way to “growth.” Now we’re busting. Of course, the boom was darn good for companies that focused on things people want more than need. The bust is making things tough all over except for bargain companies like McDonald’s (NYSE:MCD) and Wal-Mart (NYSE:WMT).

Many argue that some regulations directly fed into the crisis, such as the Community Reinvestment Act and its impact on how Fannie Mae (NYSE:FNM) proceeded, as well as its impact on banks’ lending practices. I’ve also seen it pointed out that the savings and loan crisis happened despite the fact that it was one of the most regulated industries around.

Regulators vs. reality
Meanwhile, I’ll bet we can all think of examples when regulators have done things that simply didn’t seem to make sense. How about the Federal Trade Commission’s bizarre and ongoing witch hunt against Whole Foods Market (NASDAQ:WFMI)? Whole Foods’ CEO John Mackey contended that the FTC asked for more documentation from his company when it was trying to acquire Wild Oats than it demanded when ExxonMobil (NASDAQ:XOM) hooked up. Meanwhile, the whole thing was absurd, since Whole Foods faces competition from everybody from Wal-Mart to Trader Joe’s.

It probably seemed clear to most of us that Sirius XM (NASDAQ:SIRI) was struggling under the weight of competition from many fronts, but the Federal Communications Commission took its sweet time (a year and a half) giving the OK for their merger. There’s an argument that that delay contributed to Sirius XM’s particularly dire predicament now.

The Securities and Exchange Commission could be seen as a poignant symbol of failure; it was founded after the Great Depression specifically to protect investors. In October, it was arguable that the SEC had let us all down in many ways, including allegations that it had been seeking enforcement against small violators rather than tackling large ones. More recently, the agency’s failure to uncover the alleged Madoff Ponzi scheme should make our blood run cold, especially since some even tried to alert the agency that something was amiss.

So shouldn’t we be extremely leery of increasing regulation, especially when short-sighted, slow, perhaps incompetent, possibly even corrupt regulators don’t seem to be in short supply? I’ve often been disturbed at how often high-profile figures from the government and corporate worlds bounce back and forth. It’s easy to see how conflicts of interest may arise in that environment among temptations to influence rulemaking for buddies in the industry.

For example, let’s admit it was a little creepy that former Treasury Secretary Hank Paulson’s career included time at Goldman Sachs (NYSE:GS). I recently ran across a Portfolio article delving into conspiracy theories. Some posit that Lehman failed while others were bailed because Lehman wasn’t as well connected in government. That may be a crazy conspiracy theory or sour grapes, but then again, let’s not forget the old saying that just because someone’s paranoid doesn’t mean all their supposed delusions aren’t true.  

No angels here
In the Federalist Papers, James Madison said, “If men were angels, no government would be necessary.” That quote always makes me think the same philosophical issue applies to people in government. (Madison’s quote goes on to say the government must be obliged to control itself, which may be easier said than done.)

I believe we should take a few deep breaths before adhering too strongly to the idea that more regulation is the obvious solution and panacea for all that ails us, and that regulators would have been able to head off all the dangers or even adequately foresee them at all.

Meanwhile, when it comes to regulation, the possibility of corruption and the same self-interest blamed in free market failure is very high, lobbying always causes problems, and, let’s not forget unforeseen circumstances. Even now, forming more and more “too big to fail” entities after our recent bailout frenzy may end up being a perfect example of how government can make some pretty massive strategic mistakes.   

Maybe instead of beating up on free market ideology and viewing regulation as salvation, we should contemplate what has really failed miserably: people’s ethics. Greed, ignorance, and short-term thinking have run amok, and it seems many people forgot how important it is to be responsible for their choices and to simply think with a reasonable, long-term view.

I fear that until people begin to expect a bit more of themselves and others, we will face many, many devastating failures, regardless of whether we adhere to free market or pro-regulation ideologies. And no matter what we see fit to blame it on, we won’t be able to bail ourselves out.