The financial crisis currently engulfing Wall Street has caused some to question whether the financial markets in the United States are subject to enough regulation.
This in turn has renewed the debate on the role of government regulation in the market. The outcome of this debate is likely to be closely watched in Australia as we frantically search for ways to avoid a similar catastrophe.
After a decade of Coalition rule, the word regulation has acquired all sorts of negative connotations. Former prime minister John Howard and his treasurer Peter Costello drove home the message at every available opportunity that the market should be able to function unhindered by government regulation. However, the reality of the Howard years was markedly different from the ideological rhetoric.
Take for example the so-called deregulation of industrial relations, a key plank in the Coalition’s policy platform. Although ostensibly intended to reduce red tape for businesses, the WorkChoices reforms have resulted in over 1000 pages of legislation and regulations.
The recent events in America should emphasise to all that the operation of the market free from government regulation is just ideological tripe. Markets have never operated without regulation and nor should they.
Government regulation plays an important role in keeping the market operating fairly, efficiently and with accountability. The collapse of Enron, one of American’s largest energy companies in 2001, should have largely ended the debate on the necessity of government regulation.
Although Enron initially flourished in the deregulated energy market, the lack of government oversight was cited as one of the primary reasons why Enron was able to engage in large-scale fraud without attracting attention.
The Sarbanes-Oxley Act of 2002 was enacted in America to tighten accounting standards for publicly listed corporations and prevent a similar fiasco occurring in future. By all accounts, the increased regulation has been operating remarkably well.
Financial experts agree that Australia is unlikely to undergo a similar crisis to the United States and one of the reasons for this is the tighter regulation of financial markets that exists in Australia. However, it is important that Australia takes a measured approach to the question of regulation.
The American crisis should not be used as justification to engage in an orgy of regulation in the naÃ¯ve belief that government regulations can iron out the usual peaks and troughs of the market.