Changes in regulations try to solve the last crisis rather than prevent a future crisis, and in large part it's the only thing that they can do. In this time of changing regulation, we should think about how difficult it is to gauge regulatory effectiveness in a complicated financial system. What I'm trying to say is that we know when something bad has happened, but how do we know when we've prevented something bad from happening through regulation?

Looking at the historical data as a guide to regulatory effectiveness is a poor guide. The structure of the economy, the financial system, and other regulations has changed substantially over the last couple hundred years and even the last 50 years in which we have data. Huge changes in communications, growth in financial products for consumers, changes in goals and execution of monetary policy, and changes in culture have left us with an system that is different than it was just a few decades ago. Using history as a guide for the regulation of today's financial institutions should be done with caution - we only have a very small sample.

Even if there are lots of regulation on financial services, people will still do things that do not make sense and recessions will still happen. We know that regulations can stifle innovation by making it more expensive or impossible to change. While the costs of regulatory compliance in terms of management time spent or legal compliance costs may be known or knowable, the cost of opportunities not pursued and chances not taken because of complicated or inflexible regulations will never be known.

On a final note, I do think there is a place for some regulation in financial markets. However, I also worry about regulations that are the equivalent of a 10mph speed limit on the interstate.