Thoughts on regulation

In his recent Oped at the NY times, Krugman makes the point that the lack of sufficient regulations in the face of agressive "financial innovation" has allowed for the current confusion in financial markets. I agree entirely with his point. But before anyone accuses me of defending excessive regulation, let me clarify my position on the topic. I believe that regulation exists to enable the flow of information to market players. I don't think that government should be telling the markets what to do (beyond a limited role as a social agent). To the extent that markets can create conditions whereby information is not available, the system will lead to situations like the current "subprime crisis".

Enron, the current (housing) crisis, the Great Depression, etc all have roots on a similar dynamic: the lack of available information created a misalignment between expectated risk/return and the revealed risk/returns. You can argue for caveat investor, but that is just a recepie for volatility.