The recent financial problems among the financial and investment banks, plus their insurers has brought into question the role that regulation played or did not play. The need for a bailout brings renewed calls for more regulation to govern the industry. The amount and nature of federal regulation has always been a heated debate. Despite the proclamations of libertarians, the evidence shows that federal regulation is beneficial for industries and good for the economy at large.

To simply call for "less regulation" as a boon for business takes a very naive view of the nature of regulation. Business regulations come in many different forms and are used for a wide array of purposes. One group of regulations are industry-wide regulations. These govern a particular industry and are primarily aimed at maintaining a steady balance within the regulated industry. It is this group of regulations that draw the most criticism as proponents of deregulation argue that they produce inefficiency and restrict competition. There is plenty of evidence that substantiates this view and one of the most visible cases is the airline industry which went through a series of deregulation steps during the 1970s and 1980s. The primary crafter of the airline industry deregulation, economist Alfred Kahn, argues that airline fares are between 10 and 18 percent lower and that airline safety and coverage have not been compromised. Kahn reviewed the airline industry 20 years after its deregulation and concluded that "airline deregulation has worked." The problem with this view is that it presupposes a growing industry and ignores normal business cycles. As long as an industry is growing in a strong economy, deregulation is a panacea of increased profits, competition, and services. However; real world economies never work like this. Since 2000 the airline industry in total has lost $35 billion, which is $13 billion more than all the profits it earned since deregulation. Quite frankly, the airline industry was profitable while regulated and unprofitable while deregulated. While industry regulation does appear to dampen profits and competition during good times it provides support during bad times and this is fundamental to understanding the objectives of industry regulation. The banking industry is rapidly taking the same form as the airline industry watching all its profit benefits since 1999 evaporate in a year of bank failures and foreclosure losses. If economists and bureaucrats we able to develop a system that could turn regulation on and off as needed we might have the best of both worlds. Unfortunately, no one has developed a workable model for doing this.

Another type of regulations are problem-solving regulations. They are regulations were and are designed to address social, health, and environmental problems that arise in free markets. Among these are occupational safety regulations, environmental regulations and health regulations. These regulations are generally the most bureaucratically intrusive and are often the most complained about. However; these regulations didn't stem from nothing. Everyone of them was created and evolved because of a problem. They weren't just created to irritate businesses. More significantly, deregulation in this area (or simply a restriction of enforcement) does not benefit business. Removing government oversight merely brings in a different form of oversight: lawyers. Legal action is the natural counter to business operating in unregulated sectors. As long as the public wants safe workplaces, healthy products and a livable environment business is going to have to live with one form of regulation or the other. In this case government regulation is far superior to legal regulation because government regulation is preventative and legal action occurs after an accident has occurred.

The most iniquitous call for both deregulation and tort reform to restrict legal actions. Restricting both government oversight and limiting legal challenges provides the best scenario for business profits and the worst scenario for the population. These calls generally come from only the most libertarian circles of the Republican party although they make for good political sound bites. It is really hard to see what society would gain from going back to the 19th century except that a very few people would make a lot of money, as was the case in the 1800s.

Strangely, no one knows the benefits of a regulated industry better than Senator John McCain. He helped develop an entire industry by regulating it and turned it from floundering to hugely profitable. In 1997 the Ultimate Fight Championship (UFC) was an organization that sponsored martial arts fighting with very few rules. Senator McCain called it the equivalent of human cockfighting. He first took steps to prohibit it altogether. Failing this, he called for regulation and governing bodies, which the UFC accepted. Thanks to this governance, the UFC has evolved into a multi-billion dollar industry that is rapidly becoming more popular than a couple of the "4 major sport's leagues". The President of the UFC, Dana White, has publicly thanked Senator McCain for saving the sport.

While the call for less regulation has a lot of political appeal among the Republican base it is neither a panacea for business nor does it make the economy more competitive globally. Removing every labor regulation is not going to make American labor competitive with the Chinese just as removing government inspections is not going to get beef into Korea. What is needed is regulatory reform, not regulatory removal. Making the bureaucracies more efficient, effective, responsive, and flexible will ultimately produce more benefits than a marketplace allowed to run free until it hangs itself with the ropes it sells.