Learning the right lesson: Are regulators' efforts helping or hurting the markets?

One of the maxims emerging from the global economic crisis has been that greed and a lack of oversight were the main culprits in the meltdown. The greed was hardly surprising, but the discarding of what has been the conventional wisdom in recent years – the freer the market, the better – has raised eyebrows.

Nowhere are eyebrows higher than in Beijing, where officials have seen their worst fears about unregulated economic activity seemingly confirmed. After years of being lectured about opening up, Beijing now looks wiser for its prudence.

China’s securities regulator even sneaked in a chance to thumb its nose at overseas regulators. While foreign counterparts clamped down on short selling, which some had blamed for exacerbating sell-offs in the mounting crisis, China moved forward a program to introduce the practice to mainland markets.

But it would be unwise for Beijing to take the wrong lessons from the financial crisis. Its own actions have sent mixed signals. On the one hand, past experience has some investors convinced they can rely on the government to step in should things get too dicey. On the other, Beijing has not always met those expectations.

If both too little and too much regulation have the potential to lead to abuses, China is at present following a third, and possibly even more dangerous path: An improvised hybrid of both.

It is a hybrid that distorts valuations, making investments unnecessarily risky as the veneer of a modern market masks ongoing attempts to obscure valuations.And as the global financial crisis drags on, it is also a hybrid that reduces the ability of Chinese consumers, investors and businesses to calculate the impact of this crisis on the country’s economy.

China’s regulators may have saved the markets from the worst this time around, but their present course of action will be more damaging in the long run.

The lesson from the global financial mess should be that a combination of transparency and government oversight – but not necessarily direct involvement – is the best way to avoid a crisis.