It is an article of faith for many on the right that government regulation of anything is inherently wasteful and inefficient; that government’s role as a watchdog or arbiter can only lead to less freedom, more restriction of the free market, and a less vibrant economy.

More learned people than I make that argument so I will not dispute it. The question then; is there a case to be made for government regulation anyway?

We’re getting into slippery territory by weighing the bad against the good; a loss of freedom in the market in exchange for some semblance of order. The notion that this is a bad trade off in every case is mistaken, in my opinion. Certainly there are compelling reasons why the only entity large enough to ride herd on the gigantic corporations who run our financial industry upon which we all ultimately depend is the federal government. Trusting these mega-banks to do the right thing without careful, and calibrated adult supervision contradicts the conservative principle that you can’t change human nature (Russell Kirk’s principle of the “imperfectability”) – that given the means and opportunity, the financial giants will act in ways that would be detrimental to the promotion of necessary fairness and transparency, thus damaging the free market anyway.

Kirk’s “well ordered society” and “prudent restraints upon power” should inform any regulatory scheme that seeks to balance the needs of society to protect itself and the necessity of the free market to operate. In this way, there is a conservative case for financial regulatory reform to be made. It’s just too bad that GOP lawmakers are so terrified of their right wing base that they didn’t dare work with Democrats to come up with a bi-partisan FinReg bill that would have been a more prudent, less intrusive, and more effective than the one that passed the senate yesterday. Working with the enemy is verboten and that goes double for anything that smacks of using the government to regulate Wall Street.

It is a legitimate question to ask whether Democrats would have listened to Republicans – any Republican – on a FinReg bill in the first place. Not even trying to work with the opposition on such significant legislation is irresponsible governance. Those few Republicans who exposed themselves to the fury of the base by trying to work with Democrats will get precious little thanks for their efforts. What meager concessions that senators like Scott Brown, Susan Collins, and Olympia Snowe were able to wangle from the majority will do little to alleviate the impression that this is a Democratic bill through and through, passed once again in the dead of night, with little understanding of what the senate has wrought, and will place an inordinate amount of power in the hands of regulators to make sense of the bill’s 2000+ pages.

Prudence is a lost civic virtue.

The tragedy is that there are indeed, some aspects of this bill that any conservative could have gotten behind. For the first time, a light will shine on the shadowy world of derivatives and credit default swaps – the abuse of which became a primary cause of the downfall of Bear Stearns and AIG. The NY Times Steven Davidoff:

Shadow Banking. The bill establishes record-keeping and reporting requirements for most derivatives (Section 727 and 729). It also establishes a registered derivatives exchange and requires all of these derivatives to be submitted for clearance on an exchange (Section 723). The Securities and Exchange Commission and the Commodity Futures Trading Commission can regulate and ban abusive derivatives as well as decide which derivatives are required to be cleared (Section 714). Nonfinancial companies do not need to clear derivatives if there is a commercial reason for the transaction and they notify the S.E.C. of their ability to financially meet the obligation (Section 723). These provisions as a whole ensure that there is a more open process for derivatives and the ability of regulators to assess their systemic risk.

Treating the derivatives market in a similar fashion that we regulate the stock exchange is a reform long overdue. Previously, we were treated to the spectacle of derivative traders actually betting against the plays of their clients – a grossly unethical practice. At least regulators will get a heads up if there are the kinds of abuses in the system that led to the meltdown.

What about bailouts?

The bill establishes an intricate series of provisions to place ailing financial institutions and systemically significant nonbank financial companies into receivership (Title II). The bill also has provisions allowing the government to deal with systemically significant foreign firms and foreign financial subsidiaries of American companies (Sections 113 and 210). Had these provisions existed, the government could have dealt effectively with the disastrous problems at the American International Group, Bear Stearns and Lehman Brothers.

The bill requires that in any resolution, senior management is placed farther down the line of creditors of the firm than they would in a normal bankruptcy (they are placed after the unsecured creditors and just before shareholders) (Section 210). The bill also allows the government to break financial contracts, like credit default swaps, in the resolution process (Section 210). These two provisions allow the government to avoid an A.I.G.-type situation where it is forced to hand over collateral under these derivatives contracts or otherwise pay out money to undeserving management.

There is no guarantee that a company will be “too big to fail” but it makes a taxpayer bailout a matter of last resort rather than panicked action by government. The point being, even if we allow a failing giant to go out of business, it must be managed very carefully so as not to spook the rest of the market and guarantee an orderly exit for the business.

Not perfect but probably the best that could be achieved under the circumstances.

The bank capital requirements are mostly sensible to me, although there is the risk that too stringent requirements will lessen the competitiveness of our financial institutions. As a prime example of unintended consequences, a regulatory regime that is too restrictive in how much cash and assets a bank should have on hand is a probable outcome. Regulators, by nature, are overly cautious and this area of the bill would seem to lend itself to over regulation.

There’s plenty not to like in the bill. A fairly thorough and intelligent take on this comes from Conn Carroll over at Heritage blog. No doubt there are other unknown consequences that will emerge over the next few years. All we can do is hope that Congress will ride herd on the bureaucrats and mitigate the worst of what they can do.

Could the GOP have done any better – that is, if they were of a mind to regulate Wall Street to begin with? I really don’t know. Would a GOP bill have incorporated more suggestions from the industry? Would it have been as tough on derivatives as the current bill appears to be?

What is certain is that we have another imprudent example of how not to govern an industrialized democracy in the 21st century. These gigantic “comprehensive” reform measures hand too much power to unelected bureaucrats by Congress abdicating its responsibilities to carefully weigh the consequences of their proposals before greenlighting them. The most disheartening aspect of Obama’s agenda is not that little thought is given in this area, but that no thought at all is invested in figuring out the downside to these legislative initiatives. It is beyond irresponsibility that the Democratic Congress has placed us in thrall to government apparatchiks who care more about aggrandizing power and elevating their position than in promulgating intelligent regulation. That is the nature of bureaucracy – something that the Democrats have forgotten, or simply about which the Democrats don’t care.

Reason enough to boot them from power in November.