As the news has turned a dramatic eye on our country’s financial regulatory system, I’ve been puttering around trying to separate the wheat from the chaffe.  For what it is worth, there are a few invalid arguments out there that really get under my skin.

The primary false argument?

“Financial Deregulation caused this economic mess we’re in” – Deregulation didn’t do anything that wasn’t already in place. Taking out the barrier between investment banking and consumer banking had very little effect on the outcome of the mortgage mess. The problem lies with the regulatory structure that didn’t change.

Imagine a huge slate of stone on the ground. When government interferes in the underlying economy it places a pointed stone underneath the slab of stone. The field becomes unbalanced. In order for the econmy to “work”, government attempts to place new stones on top of the large slab so that the economy can rest on the small stone underneath in perfect balance. While you can achieve some sense of parity where the slab is “perfectly” balanced, adding or removing weight at any given point will cause the slab to become imbalanced.

Now the arguments are often construed as a battle between adding stones (regulation) or removing stones (deregulation) on top of the slab. The crux of the argument is that both “sides” of the debate still believe that they can achieve a perfectly balanced slab perpetually so long as the other side doesn’t do anything to muck it up.

The problem is that no one looks to why balancing the slab matters. Simply remove the rock underneath and your slab rests perfectly sound and secure. No need to balance the thing, no need for placing burdens on top of the slab. In essence, remove government from having any regulatory controls and never have to deal with trying to make it work.

The political establishment is largely escaped from the very burdens they impose on everyone. There is no punishment for poor legislating even when the people demand poor legislation. The correlated problem is one where so long as government maintains the power to regulate, it maintains the ability to be influenced by specific demands of the regulated. If so-called liberals truly wanted to end the influence of corporate America in Washington, the right decision is to make Washington powerless to affect the course of the private sector. The right decision liberals would rally for would be a system of complete deregulation where corporate money can have no real influence over political affairs and the political class can have no influence over the private sector.