Can We Let the Market Take Care of Its Own Problems?

Markets have generally been much better (more accurate, more timely, more proactive) in assessing and addressing risks than the regulators. However, there have been colossal failures by the markets to avoid the cliff, as we have witnessed many times in recent years.

If market equilibrium is based on there being a fair risk-reward trade-off, will well-intentioned regulation – like Basel III or Dodd-Frank – do more harm than good?

Is it clear that letting Lehman fail – with 20/20 hindsight – was a terrible mistake? Maybe it instilled a greater degree of vigilance and prudence, that was sorely lacking in the wild bubble days preceding the crisis?

We all shudder at the sights and sounds of raging forest fires, volcanic eruptions, and the like. Most of the time, the environment responds – albeit with pain and long time-lapses – and comes back stronger.

Response to above, make your own opinion. You may include 1 or 2 citations.