Deregulation occurs when one reduces, removes, or blocks rules or laws or authorizes entities to engage in new, unregulated activities. Desupervision occurs when the rules remain in place but they are not enforced or are enforced more ineffectively. De facto decriminalization means that enforcement of the criminal laws becomes uncommon in the relevant industries. These three regulatory concepts are often interrelated. The three “des” can produce intensely criminogenic environments that produce epidemics of accounting control fraud. In finance, the central task of financial regulators is to serve as the regulatory “cops on the beat.” When firms gain a competitive advantage by committing fraud, “private market discipline” becomes perverse and creates a “Gresham’s” dynamic that can cause unethical firms and officials to drive their honest competitors out of the marketplace. The combination of the three “des” was so criminogenic that it generated an unprecedented level of accounting control fraud, which in turn produced unprecedented levels of “echo” fraud epidemics. The combination drove the crisis in the U.S. and several other nations.
I’m not sure that I buy the conclusion, but I do know this: with enough rules and regulations, it becomes costly or even impossible to know what is and isn’t allowed. It becomes difficult or even impossible to be “legal”. In a heavily regulated environment, the cost of monitoring and enforcing compliance can be huge. So what happens is that many people unknowingly become “criminals” and enforcement becomes selective. This easily leads to corruption, and a corrupt society encourages the truly bad actors: they might not get caught and, even if they are, they might be able to buy their way out of it. Regulation may be necessary, but too much regulation leads to an inefficient and corrupt society.
Be careful what you wish for.