by Mark Thornton, Mises Economics Blog

The financial panic that has engulfed the planet is considered by politicians, bureaucrats, journalists and mainstream economists to be a problem of regulation. I find myself in the uncomfortable position of having to agree with this gang of opinion makers, but it is not a problem of insufficient regulation, inadequate regulation, unenforced regulation, out-dated regulation, or anything of the kind.

The problem is with regulation itself. With regard to financial markets, government regulates everything. There is the Federal Reserve that regulates the money supply, interest rates and everything else. There is the Treasury with its array of regulatory powers.

There is the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board. Government has multiple layers of regulators concerning mortgages, financial institutions, and stock markets.

I have taught money and banking and was formerly the Assistant Superintendent of Banking in the state of Alabama and I can not think of a single thing related to this financial crisis that is not regulated.

Government regulation is the problem. Since going off the gold standard in 1971 we have experienced a series of bubble and bust cycles in the economy and each time the crisis has been dealt with bailouts, more regulations, and loosening of gold standard era constraints. The money supply as measured by M2 had long been just a couple of hundred billion and is now approaching $8 trillion dollars and we supposedly are still suffering from a lack of liquidity!

The American public once again finds itself playing 3 Card Monty with a dealer who insists we play and tells us that we cannot lose. We will put our bailout money down on the table, we will be reassured that we cannot lose (with more government regulation and “oversight”), the Fed will inject more fiat money and when the cups are turned we will all have our wealth ripped off.

What the American public needs to be told is that the crisis is actually the market trying to reestablish some rational order in the economy beset by regulation. It is the market that is tearing down these mega financial firms and disposing of the crazy financial products that they created. It is the market that is punishing those who grew rich on paper money schemes, derivatives, sub prime mortgages, and hedge funds. These are the same people the taxpayer is being asked to bail out–Wall Street fat cats.

What the American public needs to hear is that regulation is the problem and that the “unfettered market” is the only way to break out of the business cycle. All that is required is a gold coin system of money and for the rule of law to be applied to banking whereby demand deposits are held as reserves in the bank. The economics of gold would regulate the money supply and the interest rate would regulate the amount of demand and time deposits as well as borrowing and lending. No government regulation is required. There is no systemic or macroeconomic risk and the market eliminates the business cycle.

The only requirement is the legal recognition of the statement in the US Constitution that gold and silver are money. The market can handle everything else.