Wretchard,
As one who has some experience with these issues, I disagree with your assessment of the role of the regulator. The regulator can create more systemic risk or reduce it, but the problem is not the regulator as the regulator.
I recommend that you take a look at [at least the Amazon synopses of] “Demon of Our Own Design” by Bookstaber and “Normal Accidents” by Perrow. Systemic risk is created by complex systems. Sometimes regulation does create more risk, as you imply, by introducing layers of complexity and inflexibility that end up paralyzing a response to a problem or exacerbating the problem. But regulation can also recognize the complexity and purposely slow things down (acting as the opposite of a chemical catalyst) or attempt to target the complexity itself.
One of your posters called risk a product of lack of information. This is sort of on the right track but we need to go to the source of the lack of information. Risk in betting on a boxing match can be viewed as a lack of knowledge about who will have a good day that day. But maybe it is from evem low levels of complexity: the interaction of training, the emotional states of the performers, the officiating of the referee, exposure to various environmental contaminants (alcohol included).
There are two ways to deal with that risk. One is by reducing the lack of information through almost invasive reporting on psychological, physical and genetic profiles. The other is to reduce the exposure to the risk by limiting the maximum bets on the match (whether based on percentage of income/assets or on absolute numbers).
The boxing match analogy is an oversimplification. There really are some things that regulators can do to to reduce the information failure (the boxing match would really have a complexity issue if the boxers first had to play “Connect 4″ and the outcome of the fight was somehow related to the outcome of the game). And for some bettors, we may not care if they get wiped out.
But let’s not create the rule: regulator bad, market good. Let’s not create its opposite. The obligation to use judgment and constantly adjust never ceases.
