My thoughts on this issue are well summarized in
https://www.bookdepository.com/Just-Get-Out-Way-Robert-E-And... (ignore the simplifying title).
> In this book, Robert Anderson, a development consultant and former World Bank economist, recommends a different approach. Instead of adopting policies that are common in rich countries, Anderson suggests that policymakers take into account the institutional weaknesses typical of developing countries - corruption, deficient rule of law, cronyism, and so on. Simpler, market-oriented policies are more suitable to poor countries institutional environments and more likely to produce growth and keep the private and public sectors honest.Anderson recommends sometimes counterintuitive policy solutions for a number of areas - banking, privatization, corporate governance, bankruptcy, and competition. For instance, he argues that "rich countries were once poor countries" and that "examples from the past in rich countries may be more appropriate for poor countries today."
I chatted with the author a bit. Many of his suggestions are useful for rich countries as well.
The argument starts from the observation that honest and competent civil servants are one of the most precious commodities a country can posses. They are in limited supply, and should be used wisely and sparingly.
To give an example from child rearing: instead of the parents always intervening for how to share, teach your kids the divide-and-choose rule. https://en.wikipedia.org/wiki/Divide_and_choose
Similarly, in the US there are essentially two kinds of bankruptcies: chapter 7 and chapter 11.
Simplified, in chapter 7 the business just gets auctioned off, and proceeds go to the creditors.
In chapter 11, the business keeps running mostly under old management, but with lots of micromanaging from a court.
The former is rather simple. The latter has lots of opportunities for incompetence and corruption.
The author suggests not implementing something like chapter 11.
> Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
The average individual is not an expert in making shoes. But we allow everyone to manufacture shoes.
Customers are by and large wise enough to buy shoes from competent producers.
Historically, for banking it turns out that regulating them like shoe factories works really well. Adding special regulations just leads to lots of gaming of the system, and to regulatory capture and suppression of competition etc.
From a game theoretic point of view, governments also have a hard time committing themselves. Eg committing themselves to paying back their debts or not issuing too much of a currency even in emergencies.
That's because governments are, in a sense, too powerful.
A normal company can bind itself with contracts, and they will be enforced in court.
A government can try to do the same, but they can always pass a law that makes the old contracts void.
(Rant over for now. It's becoming a bit rambly.)