Regulatory IllusionBy Thomas E. BrewtonToday's clamor for more regulation of financial institutions to  prevent another subprime mortgage meltdown is an exercise in self- deception.Congress, led by Representative Barney Frank, is planning to overhaul  regulation of the financial community, and Treasury Secretary Paulson  has already proposed a broad program for that purpose.No doubt, much of what is proposed is needed.  But it should be  obvious from repeated experience over the decades that regulations  alone will not prevent periodic economic booms and busts.Only by dealing with the root cause will we moderate economic  cycles.  And that root cause is the ineluctable human tendency to  over-expand bank credit when the money supply is artificially enlarged.Today's proposed subprime mortgage regulations may prevent tomorrow's  repetition of that phenomenon, but they will have no restraining  impact upon whatever the next speculative bubble may be.  Sarbanes- Oxley regulation was instituted after the dot.com bubble-burst and  the corporate collapse of Enron, but it had no restraining effect  upon the speculative housing bubble, of which subprime lending is  merely a symptom, not a cause.  Before that, we had the speculative  explosion of commercial real estate over-building that ended with the  collapse of the savings and loan institutions in the 1980s.Beginning with our nation's first financial panic in 1819, similar  boom-and-bust patterns appear every five to ten years, except in  extraordinary circumstances such as wartime.In one respect, Karl Marx's economic analysis was on the mark.   Before the advent of commercial banks, there were no economic  recessions or financial panics.  In a basically agrarian economy,  good and bad crop years increased or reduced incomes, but there were  no mass collapses of businesses.The coming of industrialization in the late 18th century brought  about the beginnings of modern banking, and with it the periodic over- expansion of credit that led to periodic over-investment in long- term, fixed productive assets.  As bank credit expanded, businessmen  responded by investing in more productive capacity than available  real savings could support.In every such cycle, the end point must be retrenchment: failure of  some business ventures, liquidation of inventories at fire-sale  prices,  layoffs of excess workers, and strenuous efforts to reduce  other costs until businesses can again produce at a profit.The one and only really effective thing government can do is to  maintain restraint upon expansion of the money supply, which is the  fuel that banks use to build the fires of speculative over- expansion.  Bankers, being human, will always seek ways to invest  money when it is injected into the economy by the central bank.   Businessmen, being human, will always find new ways to employ readily  available bank credit.The process is self-reinforcing, as early business expansion proves  to be wildly profitable.  As it continues, however, the effect of  over-expansion of the money supply is evidenced increasingly in  general price inflation and depreciation of the currency.That is the stage of the Federal Reserve-created bubble we are  experiencing today.  In those circumstances, when the Federal Reserve  continues to expand the money supply in order to lower interest  rates, as it is doing today, all the wrong signals are given to  businesses and consumers.Carried forward too long, the end point is the massive inflation,  double-digit short-term interest rates, high unemployment, and low  economic production that was dubbed stagflation in the 1970s.Thomas E. Brewton is a staff writer for the New Media Alliance, Inc.  The New Media Alliance is a non-profit (501c3) national coalition of  writers, journalists and grass-roots media outlets.His weblog is THE VIEW FROM 1776http://www.thomasbrewton.com/Email comments to viewfrom1776@thomasbrewton.com