Ron Paul: Why More Regulation Makes Things Worse




Ron Paul explains why those who blame the free market for the financial crisis are wrong, and how excessive regulation encourages moral corruption as well as blind, irrational trust in government oversight.

The Moral Hazard of Regulation

by Ron Paul

Since the bailout bill passed, I have been frequently disturbed to hear “experts” wrongly blaming the free market for our recent economic problems and calling for more regulation. In fact, further regulation can only make things worse.

It is important to understand that regulators are not omniscient. It is not feasible for them to anticipate every possible thing that could go wrong with whatever industry or activity they are regulating. They are making their best guesses when formulating rules. It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.

The other problem is the trust that people blindly put in regulations, and the moral hazard this creates. Too many people trust government regulators so completely that they abdicate their own common sense to these government bureaucrats. They trust that if something violates no law, it must be safe. How many scams have “It’s perfectly legal” as a hypnotic selling point, luring in the gullible?

Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement. Many feel that just because their children are getting good grades at a government school, they are getting a good education. After all, they are passing the government-mandated litmus test. But, this does not guarantee educational excellence. Neither is it always the case that a child who does NOT achieve good marks in school is going to be unsuccessful in life.

Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it? I would caution any parent against believing this would be the case. Nothing should take the place of your own common sense and due diligence.

These principles explain why the free market works so much better than a centrally planned economy. With central planning, everything shifts from one’s own judgment about safety, wisdom and relative benefits of a behavior, to the discretion of government bureaucrats. The question then becomes “what can I get away with,” and there will always be advantages for those who can afford lawyers to find the loopholes. The result then is that bad behavior, that would quickly fail under the free market, is propped up, protected and perpetuated, and sometimes good behavior is actually discouraged.

Regulation can actually benefit big business and corporate greed, while simultaneously killing small businesses that are the backbone of our now faltering economy. This is why I get so upset every time someone claims regulation can resolve the crisis that we are in. Rather, it will only exacerbate it.

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78 Comments:

  1. I find it silly (in a scary way) that so many people refer to the 19th century as proof of the FAILURES of the free market! ;-/ http://www.youtube.com/watch?v=dmzZ8lCLhlk http://www.youtube.com/watch?v=dgyQsIGLt_w http://www.youtube.com/watch?v=YmqoCHR14n8

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  2. I find it silly (in a scary way) that so many people refer to the 19th century as proof of the FAILURES of the free market! ;-/http://www.youtube.com/watch?v=dmzZ8lCLhlk

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  3. "...we may be invaded because we wouldn't have a large military [a.k.a. goon squad for banking interests] presence."

    Seriously?

    Americans are armed to the teeth.

    I dare anyone to invade.

    They wouldn't get two feet across the border.

    Nice try at twisting my words around, newbie.

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  4. Abolish the "Federal" Reserve.

    Prosecute predatory bankers and return the money to the treasury.

    Abolish the IRS.

    Close the stock markets.

    End corporate/government partnerships except for emergencies or temporary infrastructure projects.

    Pull out of the WTO, IMF, World Bank.

    Pull out of NAFTA etc.

    Pull out of and protest the existence of the U.N. "Security Council"

    End the dysfunctional relationship with Israel, Saudi Arabia, Pakistan, Korea, Cuba, Iran etc.

    End U.S. military occupations, secret prisons, support for dictatorships, and plundering of resources, world wide a.s.a.p.

    Begin process to develop a fair, understandable and TRANSPARENT economic system.

    Begin process to develop a fair, understandable and TRANSPARENT new government.

    Throw Them All Out.

    Start Over.

    CONSTITUTION 2.0

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  5. Abolish the "Federal" Reserve.

    Prosecute predatory bankers and return the money to the treasury.

    Abolish the IRS.

    Close the stock markets.

    End corporate/government partnerships except for emergencies or temporary infrastructure projects.

    Pull out of the WTO, IMF, World Bank.

    Pull out of NAFTA etc.

    Pull out of and protest the existence of the U.N. "Security Council"

    End the dysfunctional relationship with Israel, Saudi Arabia, Pakistan, Korea, Cuba, Iran etc.

    End U.S. military occupations, secret prisons, support for dictatorships, and plundering of resources, world wide a.s.a.p.

    Begin process to develop a fair, understandable and TRANSPARENT economic system.

    Begin process to develop a fair, understandable and TRANSPARENT new government.

    Throw Them All Out.

    Start Over.

    CONSTITUTION 2.0

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  6. There is an interesting assumption from those opposing this article. They all assume that without regulations there are no checks on companies, and they will automatically start doing things that are bad for their customers. That doesn't make sense. Companies want to make money, not please the government, and they make money by pleasing their customers, not by pleasing the government. Government regulations just don't accomplish anything, and should be reevaluated.

    Now, I know people say, “We can’t do that!” We need the government to impose a level of standards, for the common welfare. Lives are at stake. There are obvious negative results to that to that justification. First, it just limits our choices. I can’t choose to sell a food product from my home, you can’t choose to buy lemonade from a lemonade stand. You can’t choose to pay anyone with a car for a ride, and if you don’t have a couple thousand dollars you can’t get approved to charge other people for a ride in your car. For simple business licenses the cost is too great for many people to overcome.

    Secondly, even with the billions of dollars being spent by the government on licensing agents and hundreds of bureaus of safety and such, and the billions of dollars being spent by companies trying to follow all the regulations, even the useless ones, there are still problems! Every few years there is an e-coli breakout. Recently in spinach and peanut butter. Even with all the regulations, you still get drugs pulled off the market for extreme side effects. Even with all the auto regulations, you still get cars with faulty brakes. Which had a stronger effect on Toyota; the government response, or millions of horrified consumers? Even with medical regulations, you still get deaths from routine operations and incidental infections.

    whyimconservative.wordpress.com

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    • First of all, if Ron Paul is a true Libertarian, he would be against corporate/government partnerships to begin with. I've never heard him advocating eliminating corporations altogether, or even limiting them to emergency or temporary infrastructure projects. He may have called for that, but I've never heard it, and I've listened to him often.

      Secondly, and more importantly, there are good regulations and bad regulations. Good regulations have kept influential industries from misleading, cheating, and/or defrauding the public. Bad regulations have allowed the military industrial insanity to go virtually unchecked for decades. Libertarians are always saying that we should be a system governed by laws, not leaders, and I agree, but what are regulations if not laws? Again, there are good laws and bad laws, good regulations and bad regulations. What we need to do is get MONEY out of government. We should end the corporate/government system except for emergency or limited infrastructure. We should rethink exactly what government can and should be, and REBOOT. Constitution 2.0.

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      • p.s. I am actually supporting Ron Paul in spite of my differences, because I think he's honest and has everybody's best interest at heart. I think that once deregulation reached it's logical effect of Profit Before Life he would rethink some of his ideological beliefs and adjust accordingly. It was deregulation that got us into this mess. Things started getting worse not long after Reagan was appointed president by the powers that be.

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    • One more thing, the notion that people won't support a company that abuses it's influence....

      'Wal-Mart'

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      • @smujismuj Wal-Mart is an EXCELLENT example of how Government Regulations CREATE an unfair market place. Wal-Mart spends BILLIONS lobbying, from Washington all the way down to the local municipalities. They receive Government tax breaks, access to property and services that are restricted from other businesses, and of course, have teams of lawyers constantly finding legal loopholes to manipulate. I'm not sure that a better case exists for deregulation than Wal-Mart! :-/

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        • @jparthum

          What does that have to do with Walmart treating it's employees like crap, or exploiting cheap slave-labor overseas? The point is, that laws are regulations. We used to have some sensible laws concerning public protection from abusive private industry. Reagan was conned by private interests to begin the last forty years of deregulation that has allowed the infiltration of business interests and religious interests into government. THAT is why we are faced with the STUPIDITY we see today. DEREGULATION of banking, the stock-exchange, the healthcare industry, the WAR industry...I could go on and on and on...is what caused this crises. We need laws...SMART laws. And when they are broken, the people who break them need to be accountable. If the laws is bad it gets fixed.

          REGULATIONS ARE SIMPLY LAWS

          Are you an anarchist?

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        • @smujismuj I am an 'Anarcho-capitalist' (IE: Libertarian) - http://en.wikipedia.org/wiki/Anarcho-capitalists . Your being very general in your descriptions - Why don't you explain to me why a person would remain employed in a job where they were 'treated like crap'? Lack of competitive employment opportunities? Restrictions on their healthcare options? The industries that you cited are, and have been, among the most HEAVILY regulated of ALL U.S. industries.

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    • I think it is very difficult for people view this from outside of the 'box' that they were born in. Every 'argument' here FOR regulation overlooks the fact that "We the PEOPLE'" would become the regulators, DIRECTLY, by 'voting' with our wallets. It's only Government FORCE that has limited our current choices. Without their Regulations, we could CHOOSE whether or not to shop at Wal-Mart, or who to buy our Water from. How would it be in ANY company's best interest to screw us over? Our Dollars would flee from their company overnight and they would disappear.

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      • "How would it be in any company's best interest to screw us over?"

        Can you spell Rockefeller?

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        • @smujismuj I don't understand what your point is. "By 1868, with Rockefeller continuing practices of borrowing and reinvesting profits, controlling cost and using refineries' waste, the company owned two Cleveland refineries and a marketing subsidiary in New York; it was the largest oil refinery in the world.""In June 1870, Rockefeller formed Standard Oil of Ohio, which rapidly became the most profitable refiner in Ohio. Standard Oil grew to become one of the largest shippers of oil and kerosene in the country. The railroads were fighting fiercely for traffic and, in an attempt to create a cartel to control freight rates, formed the South Improvement Company, in collusion with Standard and other oil men outside the main oil centers." - http://en.wikipedia.org/wiki/John_D._RockefellerHeavily 'regulation' (subsidizing) of the railroad industry led to Standard Oil's monopoly (assuming that is what you're referring to?).

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        • @smujismuj I don't understand what your point is. "By 1868, with Rockefeller continuing practices of borrowing and reinvesting profits, controlling cost and using refineries' waste, the company owned two Cleveland refineries and a marketing subsidiary in New York; it was the largest oil refinery in the world.""In June 1870, Rockefeller formed Standard Oil of Ohio, which rapidly became the most profitable refiner in Ohio. Standard Oil grew to become one of the largest shippers of oil and kerosene in the country. The railroads were fighting fiercely for traffic and, in an attempt to create a cartel to control freight rates, formed the South Improvement Company, in collusion with Standard and other oil men outside the main oil centers." - http://en.wikipedia.org/wiki/John_D._Rockefeller Heavily'regulation' (subsidizing) of the railroad industry led to Standard Oil's monopoly (assuming that is what you're referring to?).

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        • @smujismuj A fundamental misconception about economics is that an accumulation of money by one person or organization automatically means that other people/organizations have less money. This is true when there is ANY Government involvement, but is completely false in regards to 'Producers'. If you plant a garden and grow (produce) 100 tomatoes, you have ADDED 100 tomatoes to the economy - nobody else has LOST tomatoes because you have ALSO produced them. Another fundamental misconception is that 'Profit' is one-sided. If your neighbor 'produces' 100 potatoes, then simply by having that quantity, they may be less valuable to him than they are to you, just as your tomatoes are less valuable to you than they are to him. If you both agree on a FAIR trade of tomatoes and potatoes, you BOTH Profit. But if either of you have had a Government regulation imposed/bestowed on you, whether a 'negative' (such as restrictions), or a 'positive' (such as subsidies), then the value of those products becomes artificially skewed, and someone gets screwed (tip: It's NOT the government 😉 ).

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      • @jparthum

        Isn't it interesting that business interests preach about how government will ALWAYS become corrupt, and then do everything in their power to make sure that happens.

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        • It's not just business interests though, virtually EVERY historian is in unanimous agreement, and our forefathers were very keen to this as well. By nature, man is competitive and seeks to dominate. There are essentially two methods by which to gain 'supremacy' over others; 1) to excel in achievements to higher degree than others, or 2) to oppress achievement by others. The former is difficult, and becomes increasingly more difficult over time, as man's achievements continue to advance. However, the latter is IMPOSSIBLE, unless the use of force is implemented. Government, by definition, has ONLY the tool of oppression at their disposal, and ONLY because their power is backed by the use of force. By the very nature of Government, our forefathers recognized that oppression's ONLY useful function, is it's effectiveness in COMBATING oppression. I regard Government as being very similar to a firearm kept for personal protection - If that gun is used against man for ANY other reason except in a self-defense capacity, it is both immoral, and illegal. Our Federal Government's duty is STRICTLY to protect the inalienable rights of U.S. citizens (IE: Life, Liberty, and the Pursuit of Happiness) against oppression by ANY other persons, groups, States, or Countries. With ALL citizen's rights EQUALLY protected, the method of oppression as a means for achieving success remains impossible, thus innovation and perseverance organically become the best methods for achieving success. B-)

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        • @jparthum

          Your rhetoric is so awash in absolutes.

          "...virtually EVERY historian is in unanimous agreement..."

          Really?

          "...ALL citizen's rights EQUALLY protected.."

          by whom?

          Who protects 'citizens'?

          What are 'citizens' in an 'anarcho-capitalist' system?

          Who polices abusive industry?

          The notion that consumers will hold industry accountable is laughable.

          Consumers look for the best deal, period.

          There are people who hold businesses accountable and speak out about it and refuse to patronize businesses that pollute the environment or abuse people in other countries that don't protect their workers, you Libertarians probably call those people 'Socialists'.

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        • @smujismuj Do some research. Or use some common sense. 😉 How can ANY citizen be a 'victim' of corruption if ALL dealings with others are PURELY voluntary? Industry wouldn't NEED to be 'policed' if citizens weren't coerced, (or often FORCED) to deal with them by Government, BECAUSE 'citizens would look to the best deal, period'. Apparently you assume that all companies in a given industry would conspire together AGAINST the very citizens who keep them in business...? How would it be in the best interest of ANY company to artificially inflate our OWN prices in order to benefit their COMPETITION? I'm sure many might AGREE to some secret conspiracy in order to get the other sucker companies to keep their prices high, but they would be stupid to NOT lower their own prices and take ADVANTAGE of the the conspiracy in order to gain ALL of the business for themselves - there is no honor among thieves, unless they are politicians. You don't seem to even understand the definition of 'Socialism'. :-/ Socialism is the inevitable result of increased Government regulation - rather than DEREGULATING a group whenever the negative consequences of regulation are realized, people like you call for MORE regulation on the group who IS NOT regulated, in the name of 'fairness'. I've already given you a great example of this in the Wikipedia quotes pertaining to Rockefeller; In the first quote - WITHOUT an unfair advantage given to him through Government regulation - his company grew to be the largest, most prosperous oil refinery in the world, by 'borrowing and reinvesting profits, controlling cost and using refineries' waste'. In the second quote - after creating a cartel with the Railroads (who received MASSIVE Government subsidies) - he no longer needed to compete 'fairly' (morally/ethically) because he then had Government FORCE (oppression) on his side. Of course, Government's answer to this problem - which THEY created - was to impose EVEN MORE restrictions, in the name of 'fairness'. Government ONLY has the power of OPPRESSION backed by FORCE at it's disposal , that's IT! Their easiest, most readily available solution for EVERY problem, is simply MORE OPPRESSION!http://www.youtube.com/watch?v=DYeYPcougmA

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    • Regulation is not the answer however, enforcing the law and holding criminals accountable for their crimes is. As long as institutions like the FCC, SEC and Federal Reserve continue to allow the major players to avoid punishment for criminal behavior, this economy is doomed. Here's an idea, clean house in these agencies and replace the criminals with Americans that will follow the rule of business ethics. Most people are aware that the government agencies have ignored the financial homicide perpetrated by big business against both the public and private sector.

      Failing to address the real problems facing the U.S. economy will result in revolution. People will band together to dethrone the powerful elite and throw them in the FEMA camps built by the same. The terrorists are our own countrymen and women that run big business/government and they need to be prosecuted for treason and stripped of their own freedom.

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  7. Regulations, for the Regulations to check the Regulations hmm this is confusing.

    Go Ron Paul :-)

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  8. Here's some lack of regulation for you...HOW is it "liberty" when the people are overturned by unstoppable leverage of corporate money???

    http://www.nakedcapitalism.com/2011/08/matt-stoller-standard-poor%E2%80%99s-predatory-policy-agenda.html

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  9. Savings and Loan Fraud, Enron, Wall Street Derivatives Con, Fannie Mae privatized, Corporate Off-shoring, Florida Special Ed Con vouchers...so , you want to privatize the water now, guess where your rates will go then, IF you can get water at all...Let's see what all the those sand huffing retirees in Phoenix do without the Federally built Hoover Dam...the world is not an open playground, and all you rightie "libertarians" are just deluded Reaganites who were propping up Walmart nation while they were blowing the Chinese in the back seat. Want to privatize everything and lose control of oversight? Then you ought to travel to Africa if you want to see what your world will look like when it's totally run into the ground. Don't claim to be for the people when you don't even know what the original Tea Party was about, and don't call yourself a patriot when you want to sell the highways, land, and water of the people, for the people...there is another way to freedom and away from Fascism, but you aren't there yet, and sadly, neither is Dr. Paul.

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  12. I read this article and I blacked out. The next morning I woke up in a field covered in blood next to a half-eaten deer carcass. The only explanation I can come up with is that somehow the insanity of the article wormed its way into my skull and I lost all sense of judgement.
    I think it was the part about how water inspection is a waste of time because government scientists don't actually know anything.

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  16. Hi All:

    PNC Financial Services Group, Inc. of Pennsylvania plans to buy National City Bank of Ohio. National City is one of our in "trouble" banks, and NCB could not qualify for funding under the "bailout rules". But, PNC did qualify for funding (almost $8 billion to date) and is using just more than $5 billion of that money to acquire NCB!

    PNC states (I'm paraphrasing) "the bailout funding puts the NCB acquisition on very firm footing".

    Really!? Imagine that, PNC gets "free" money to acquire a "troubled" competitor and PNC says its purchase is "on very firm footing".

    I didn't authorize PNC to spend my (our) money in this manner, I also didn't reject funding for NCB.

    In my opinion, this is more proof of the empowered (government bureaucrats along with PNC and its directors [the "in" people]) using the disenfranchised (in this case NCB and its directors [although I believe the directors of NCB will not be hurting]) to solidify control over our government and our finances.

    The bailout bill was a complete disaster, and I believe history will confirm this belief.

    Now, the question is, what do we do? What is the best use of our time and efforts?

    I watched the video of RP in Houston supporting the End the Fed protest. How do I best support the needed change in our government?

    I have joined my local "meetup" groups and have reached out to other local groups. I plan on assisting in and on the Bill of Rights movement in December.

    Can anybody provide guidance to regional/national groups, or other relevant groups/sources that may further our cause?

    Thanks,

    k

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  17. What he does not mention is that the government can easily outlaw these loopholes that corporate lawyers will find which will make it harder for lawyers to get unnecessary loans passed.

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  18. i wonder why not one single congressman, senator, president stood proudly forth and graciously offered to take a 40 % cut in salary, staff salary, etc. right through the white house, congress, senate, pentagon. also while we're at it, how about a 40% drop in regulations& laws,.
    imagine if the state and local went along. wow. if that's not worth 2,000 points on the dow i would be surprised. and not one of our darling media, left or right. keith or rush or bill or npr have breathed a word of a cut like that. and to the one part of our national economy that we can afford to cut

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  19. RP: "It is often difficult for those being regulated to understand the many complex rules they are expected to follow. Very wealthy corporations hire attorneys who may discover a myriad of loopholes to exploit and render the spirit of the regulations null and void. For this reason, heavy regulation favors big business against those small businesses who cannot afford high-priced attorneys.

    Ok, So all this says is that in the presence of Regulations, Big Corp can find loopholes to avoid said regulation, while small business can't afford too. My point is that If there were no regulations , no corporation would have to pay to find loopholes, they could just exploit us with no checks and balances whatsoever. Melamine in our coffee, cheap air bags in our cars, and hedge funds, derivatives and regularly manipulated stock prices and financial reporting Enron style - all to our detriment.

    RP: Many people did not understand the financial house of cards that are derivatives, but since they were legal and promised a great return, people invested. It is much the same in any area rife with government involvement."

    Lack of regulations would not make people understand Derivatives anymore than they do now with regulations. Again, without regulations of any kind, Corporations would be free to deceive us even further than they do now - just like JP Morgan and cronies did in the early 1900's - manipulating the stock market in absence of regulations so bad that they effectively brought about the stock market crash and central banking as we know it.

    RP:" Is your drinking water safe, just because the government says it is? Is the internet going to magically become safer for your children if the government approves regulations on it?"

    How would deregulation tell me that my drinking water is safe? Were it not for Gov Reg's. who would be preventing any corporation big or small from making my water with Melamine or other cheap chemicals? Less regulation would allow them to do this however they see fit to make a buck and higher profits.

    RP "The question then becomes “what can I get away with,” and there will always be advantages for those who can afford lawyers to find the loopholes. The result then is that bad behavior, that would quickly fail under the free market, is propped up, protected and perpetuated, and sometimes good behavior is actually discouraged."

    Ummm, again, in a free deregulated market, there would be no checks and balances to prevent corporations from killing us with their practices. Who would test for cheap airbags? Who would test for bad ingredients in our food? How would we find out about these things? We would find out be people dying first, and investigations following - of course, we then have to ask who would investigate? Can the regular American afford the attorney's to sue some big Corporation? Remember the true story movies "Erin Brockovitch" and "A Civil Action"? In these movies big Corporations were illegally poisoning a large portion of our population with illegal dumping of chemicals, leaving the common citizen to fend for themselves to bring justice. The only difference between what happened under regulation and the great "free market" is that under a Free Market, what these companies did would be LEGAL.

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  20. I have to say, both sides of the argument here are making excellent points and acting relatively mature. Most people at this point start name-calling and vulgarities. I believe that minimal governmental interference is best, but of course there has to be SOME regulation; hopefully minimal.
    Since we cannot predict, therefore regulate the entire economy because of the infinite variables there are, we must have a system that is the most natural, so that the largest amount of incentives are available to do the right thing. This, however, doesn't mean that there won't be exploitation. This of course has to be stopped.
    But I urge people to understand both sides, because the truth has no bias.

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