The central question of financial regulation in developed capitalist economies is whether government regulation of financial markets and institutions enables the financial system to operate more efficiently or alternatively obstructs or even counteracts that goal. The latter state of affairs, labeled “moral hazard” by economists, is at the heart of current debates. This article argues that financial markets constitute a public good essential to contemporary society, and that the recent global financial crisis has reopened political questions not seriously asked since the 1970s and the onset of the “deregulation” paradigm, which treated financial markets and institutions as private goods. Without government rules, restrictions, and support, financial markets tend to be beset by monopolistic behaviour, excessive risk-taking, fraud, and periodic crises, thus becoming even more inefficient. In this context, the concept of the “efficiency” of financial markets is contested too. Does it mean profit-making and “shareholder value” for market actors and institutions, as proposed by many economists, or does it mean the efficient reallocation of capital and economic resources from investors to producers in ways that promote stable, continued, and equitable economic growth? Furthermore, however, the globalization of financial markets has made effective regulation infinitely more complex, and this article briefly surveys a number of core issue areas that cut across diverse levels of governance, leading to some mixed and partially effective reregulation but also much scope for interest group politicking, regulatory arbitrage, regulatory capture, and regulatory fatigue.
