Sunday, April 12, 2009

Regulations Relocate Risk Taking

Calling for more regulation or a super regulator is a kneejerk reaction that will not prevent future problems. Too often, regulations are about penalizing and criminalizing a past activity after its weaknesses become apparent. Businesses do not like to continue activities that lose money and garner bad publicity. They will change or stop to prevent further damage to their sales and profits before government regulation is proposed or enacted. Allowable activities will be how a financial institution or any regulated company makes it money and profit. Company growth by necessity comes from allowable activities.

Companies and managers will always seek ways to increase sales and profits. Even without bonuses and stock options, managers want their companies to grow to allow for more internal promotion opportunities, raises, benefits and status. The unemployed and new job entrants want companies to grow so there are open positions for them.

There are and will always be people who take greater risk in all aspects of their lives including at their workplace. These workers or bosses will always finds ways to push the envelope. Many times, pushing against the boundaries is good because it leads to better products, processes, cost savings, new jobs and new businesses. Sometimes, pushing the envelope will lead to product, process or company failures. Capitalism is about risk-taking and it has benefited our country and people greatly over the last 200 years. Our standard of living and job growth is still the best in the world. It occurred because capitalism rewards risk-taking.

Regulations do not stop risk taking. At best, regulations relocate the risk taking to a different part of the business or economy. Where there is risk taking, there are both successes and failures. Future market place failures will continue to occur, but in different businesses or products than in the past. However, there are and will continue to be enough successes to make the failures worthwhile. Regulations are about closing the barn door when it is too late. Regulations do not prevent future product and business failures. If they do, capitalism will die. Without risk, there is nothing new and with risk, there is failure.

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