Have any noted "free market, deregulation" advocates changed their tune?

[puddleglum]

@Shalmanese

One thing I’ve never seen pure free marketers answer adequately is how the free market can deal with prisoner’s dilemma style situations. The cause of our current financial crisis stems can be fundamentally reduced down to a prisoner’s dilemma. Each party rationally did what would maximise their financial gains but which the end result was massive financial losses.

I read alot of free market economists and none of them deny the possibilty of bad outcomes from free markets, they would just deny that the outcomes from government interventions would be any better. Regulatory capture is the most likely outcome of increased regulations because of the incentives involved. Warren Buffets gives an example:

QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again?

Mr. BUFFETT: Well, it’s really an incredible case study in regulation
because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that’s $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.

QUICK: Mm-hmm.

Mr. BUFFETT: And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went–wrote 100 page reports, and they said, ‘We’ve looked at these people and their standards are fine and their directors are fine and everything was fine.’ And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350–340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn’t have a word in there about themselves, and they’re the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.

QUICK: That sounds like an argument against regulation, though. Is that what you’re saying?

Mr. BUFFETT: It’s an argument explaining–it’s an argument that managing complex financial institutions where the management wants to deceive you can be very, very difficult.

It is the regulators job to take away the punch bowl just as the party is starting to get good. However the regulators owe their jobs to the good graces of the party guests.