The Institute for Economic Affairs, the prestigious British think-tank, has released a comprehensive, two hundred page long, study of the causes of the financial crash. Its conclusion is that “Government failure had a leading role in creating the conditions that led to the crash.”

As the IEA sums it up, “It may be overstating the point to argue that the crash was caused by government failure but it certainly appears that there is nothing that governments and regulators have done that made the crash less likely or made its consequences less dire.” According to the IEA, central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk, while, in the U.S., government policy “encouraged high-risk lending through support for Fannie Mae and Freddie Mac.” The problem was not that regulators lacked the power to act: it was that they did not act, and to the extent they did, they incentivized opaque and risky behavior.

It is therefore not sensible to believe that giving more power to regulators is the answer. Yet while the banks that failed have lost most or all of their value, the regulators who failed are being given more responsibilities. In that light, Samuel Gregg’s contribution to the IEA’s study is particularly striking. He concludes by noting that “In the end, no amount of regulation – heavy or light – can substitute for the type of character formation that is supposed to occur in families, schools, churches and synagogues.”

Relying on regulation ignores the fact that participants in the market, like everyone else, ultimately need to practice prudence. That, of course, is an insight as old as Adam Smith – the Smith of the ‘invisible hand,’ who first made his name as a moral philosopher. Reacting to the crash by relying on governments to guide that ‘invisible hand,’ is, ultimately, to reject not only Smith’s insights into the free market but his belief in the moral value of civil society.