Regulation and Risk

"I know that vibration was not normal."
--Jack Godell (The China Syndrome)

Many fine pieces today on Minyanville discussing yesterday's intraday crash. After reading this one, it struck me that confidence in regulatory oversight induces widespread moral hazard which increases systemic risk. stated formally:

Proposition: The greater the market regulation and oversight, the higher the systemic risk.

Ponder the irony of that. The more we regulate markets, the greater the chance of a broad failure. To the extent that this proposition is true, then this situation has to rank up there w.r.t. the Law of Unintended Consequences.

This also has ramifications for models of regulatory failure or regulatory drift. Perhaps it's not a 'breakdown' of the regulatory system per se. Maybe the regulatory system merely becomes 'undersized' to handle the increased risk as moral hazard builds.