Having to pay a lot of attention to your bank to wonder what’s going on behind the scenes is work and requires expertise. There’s no reason to have everyone do it, we can create agencies full of experts to do it for us.

Only thing that can stop this misalignment of incentives is to revoke the regulatory privileges of banks. Let everyone bank directly at the Fed. There's no reason these banks should get the privilege of holding other people's money. They dont hold the risk so they shouldn't hold the privilege.

This sentence sounds profound but it’s meaningless.

Of course you can regulate incentives, by definition a regulation is something that changes the incentive structure.

For example the fact that I have more money if I don’t pay my taxes is one incentive. If that was the only incentive at work there’s a good chance I wouldn’t pay anything. But there’s also an incentive that if I pay I avoid heavy fines and possible imprisonment. So I do.

I have a financial incentive to steal shit, and a regulatory incentive to not steal shit. And so on.

But when you're up against corporations, the only thing they can lose is money. And the incentive structure is such that losing 100% with some probability is still profitable. That's why this happens. No regulation can bring the loss further down. Therefore you can't regulate it away.

Regulation is only a possible solution to a problem when it has a high enough probably for a penalty, and high enough penalty (100% is always the maximum!), to tilt back the expectation value from different choices.

You can't solve this with regulation. Regulation can't, by definition, solve misaligned behavior which already happens under when the risk is 100% loss on getting discovered.

Regulation doesn’t just apply to the corporate entity it applies to the actual humans involved.

You can have regulations that require those humans to provide regular documents to the government with severe penalties for falsifying them, you can require licensing and training and all sorts of things.

Of course criminal prosecution is a type of regulation. It’s also a standard counterpart to run of the mill corporate regulations that creates incentives for people to follow regulations. People have kids and families and most certainly respond to incentives.

You can threaten those humans with loss of everything they own and their own personal feeedom.

Try running an airline without any licensing and see if shutting down the airline is the maximum consequence . Good luck with that.

Regulations have teeth. The government of course can do more than just wipe out a company.