In search of fairy tale regulators

Arnold Kling echoes my skepticism of regulation:

Kevin Drum writes,

From a systemic point of view, the real issue is that predatory lending on a large scale helped to massively inflate the housing/credit bubble of the aughts. If the home loan market had been regulated stringently enough to keep mortgage lending relatively sober, the bubble most likely would have been half the size it ended up at...

Well, yes, if a regulator had stepped in and required 10 percent down payments, the bubble would have been much smaller. That is excellent hindsight. But in the real world, with real politicians, there is no way that a regulator would have done that. The result would have been to drive first-time homebuyers, particularly minorities, out of the market. That was an inconceivable policy decision in 2004 or 2005.

One of the assumptions about the "markets fail, use government" folks is that government always knows what it's doing. I guarantee you that the next financial bubble will be something that the regulators miss, just as they missed the last one.

For the record, I think a regulation requiring larger down payments would be the most effective way of preventing future housing bubbles, but of course none of the politicians want to go down that route. Quite the opposite, they're actively encouraging 3.5% down payments and $8,000 tax credits (which can be used toward the down payment).

Hat tip to an anonymous commenter for the second link.