The technocratic compulsion is very seductive to a lot of people (including, I think, our President-elect). I can't tell you how often I hear "if we just had one smart person to clean up the mess..." But it never works. Just think about this auto czar idea being trial-ballooned this week. Even if you could find someone brilliant enough to perfectly discern and synthesize the diverse buying interests of a hundred million consumers, he can never have the right incentives sitting in that government job. Pretty soon he has group A insisting that he needs to mandate more fuel economy and group B that he needs to protect union jobs and group C that he needs to save jobs in Michigan in preference to Ohio and group D advocating for Ohio over Michigan and... you get the point. All rolled up with the incentive problem that if he actually solves the problem at hand, he will be out of a job, so you can bet the problem is never fully solved.
My wife read the Michael Lewis article and comes back to me and says "I can't imagine how you can read that and still oppose government intervention and increased regulation." I said, "why?" Sure, people screwed up and did stupid stuff, but no defender of capitalism promises that won't happen. Besides, what regulation would you propose? "I don't know, but someone smart should have been watching them."
And that is what the argument usually boils down to - someone smart should have been watching them. But lots of smart people were watching all the time. You can see one such person featured in Lewis's article. Guys run all over Wall Street looking every day for some single digit basis point spread they can make money off of. But untold wealth was just sitting there for someone who was willing to call bullshit on the whole CDO/CDS pyramid game. These guys playing this game were searching for people to bet against them.
And despite this, despite untold wealth as an incentive, and companies looking for folks to take the other side of their transactions, only a handful saw the opportunity. Thousands of people steeped in the industry with near-perfect incentives to identify these issues ... did not. What, then, were our hopes of having some incremental government bureaucrats do so? Usually, after this kind of crisis, there are lines of pundits and writers ready to suggest, with perfect hindsight, new regulations to avert the prior crisis. But, tellingly, I have heard very few suggestions.
Back in the 1980's, everyone was freaked out about junk bond-financed hostile takeovers, greenmail, leveraged buyouts and the like. Since, while this activity has not disappeared, the wackiest of this behavior has really died down. Do you remember that act of Congress and subsequent regulation that really curtailed this behavior? Yeah, neither do I. The fact is that, if they are allowed -- and if they are not shielded by taxpayer-funded bailouts from the consequences of their actions -- individuals learn from their excesses. Or they go bankrupt.