A Sporting Chance for Regulating Capital Markets

Jul 11, 2011 Career News

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text size: T T Viewpoint July 12, 2011, 12:05 PM EDT

By Roger L. Martin

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How do you fix a broken game? Or more importantly, how do you regulate a game over the long-term to keep it from breaking? These questions should have been on the minds of our financial regulators as they reacted to the 2008 stock market crash. Instead, they focused on how to manage the risk associated with mortgage derivatives and missed the much bigger problem: How do we keep players from gaming our capital markets and causing devastating meltdowns?

Regulators have tried to fix the markets before. In 2002, after the spectacular dot-com bubble burst, the solution was a comprehensive overhaul of regulation, with Sarbanes-Oxley as the centerpiece. Yet, as 2008 proved, Sarbanes-Oxley didn’t fix even a fraction of the market’s ills. Now regulators are again attempting to fix our markets—once and for all—this time with Dodd-Frank.

Washington’s approach to regulating our financial markets follows the most common theory of regulation: Create the perfect set of rules that, once codified, are studiously maintained and protected from challenge or modification.

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