Financial transparency isn't enough
It was good to hear Obama today continuing to fight (well, OK, it's the Obama version of "fighting," which isn't likely to leave any lasting marks) for financial reform. He noted that greater transparency of financial transactions might have prevented the meltdown.
As Chang says, the only hope we have of dealing with this complexity is to make simplifying assumptions: to "deliberately restrict our freedom of choice in order to reduce the complexity of problems we have to face."
This leads directly to the money quote:
Often, government regulation works, especially in complex areas like the modern financial market, not because the government has superior knowledge but because it restricts choices and thus the complexity of the problems at hand, thereby reducing the possibility that things may go wrong.
An example: it was a choice of the banksters to operate with 30X leverage. Given their confidence that they were too big to fail, you could even argue that it was a rational choice (further encouraged, let's admit, by the irrational glory of being the baddest gunslinger in town). Had the government regulators simply restricted this choice (and perhaps a few other similarly irresponsible ones), we wouldn't have had to do the hated bailouts or cope with the Great Recession.
And one final key point: even if you grant the free marketeers that an unregulated market works best for that market, there is obviously no guarantee that what's best for that market is best for the society as a whole.