Question Time yesterday was dominated by the “global financial crisis”, with both sides asking questions of the PM and Treasurer about it.

I confess I find it hard to get excited about the crisis, even as the “billions” are replaced by “trillions” (and what comes after trillions anyway?). Yes, I understand the point that Everything Is Connected. I know that if Wall St catches cold, Main St might sneeze, prompting China to get out a hankie and our resource companies to rattle around in the medicine cabinet for the Orthoxicol left over from last winter.

I know the clichés perfectly well. But I keep thinking of our unemployment rate, which fell again last month, despite announcements of retrenchments and the fact that the economy has slowed significantly, and I wonder if, even though it’s a lagging indicator, the Australian economy is a lot more robust than people might think.

But in any event it seems it’s in everyone’s interest to play up the crisis. Certainly the media — that goes without saying. We love to yell “fire”, and if we need to light it ourselves to do so, that’s okay. And it’s certainly in the interests of the Opposition, who apart from anything else would like to subtly hint that, even if it’s all happening overseas, it’s somehow — maybe even karmically — the Government’s fault.

The Government is eager to play it up as well, given it furnishes endless opportunities to criticise the “irresponsibility” of the Opposition.

Oh, and it’s in the interests of investment bankers, as well, because the greater the crisis, the less scrutiny there is of that great capitalist tradition of running to governments for a bail-out.

The issue yesterday was ASIC’s ban on short-selling, and whether this was evidence of incompetence on the part of — well, as far as the Opposition was concerned, the Government.

Wayne Swan emphasised — correctly — the independence of the regulator.

The Opposition wants to have it both ways on this. Whenever Swan mentions the stability of Australian banks, they interject “Why’s that, Wayne?” Peter Costello, whilst elegantly jumping the shark at the Press Club last week, went to considerable lengths to explain that the Howard (-Costello) Government was responsible for the stability of the Australian financial system. Yet you don’t see them sticking their hands up for home-grown debacles on their watch like HIH or Westpoint. They’re the fault of the regulators.

This isn’t a trait peculiar to the Coalition. Labor wants it both ways as well. It’s what Australian politicians do. They all have a love-it-or-loathe-it approach to regulation.

In the last couple of decades, the Australian approach to regulation has been based around what Professor Ian Harper calls a “regulatory pyramid”, which starts at the bottom with self-regulatory or co-regulatory measures, then escalates in severity through mechanisms such as undertakings, through to civil and then criminal penalties for the most egregious of infringements.

This works well in theory, but in practice many Australian regulators ignore the top half of the pyramid in preference for working with the industries they are supposed to be overseeing to minimise compliance and infringement costs. Many decline to use the powers they have because they see industry as partners. That seems to be CASA’s approach to Australian airlines.

Those few regulators — like the ACCC — who use their powers to aggressively find politicians unwilling to give them the sort of regulatory tools necessary to make business take them seriously. The ACCC has been pushing for more powers for years without luck, although Chris Bowen is showing a commendable interest in further strengthening the TPA.

One suspects the ACCC is a slight exception because it isn’t industry-specific. Many regulators are limited to one economic sector, making it easier for industry heavyweights — and in Australia that usually means only a small number of dominant firms — to influence Ministers to discourage anything that could be portrayed as “draconian” regulation. The best example is the television industry.

The other problem with the pyramid model is that it provides opportunities for industry to exploit mechanisms and litigate to prevent escalation to more serious penalties. The natural tendency of regulators to bend over backwards to ensure natural justice for the regulated only encourages this. That’s one of the reasons why ACMA takes six months of judicious chin-stroking to decide to take the most insipid of measures against broadcasters who have breached their own codes or even broken the law. Sometimes it looks like Macquarie Media Group has built an entire business model based on that.

Accordingly, politicians are happy to laud our “independent” regulatory regimes when they work effectively — which, given most Australian businesses are run competently and at least semi-ethically, is most of the time.

But in many sectors we have set up regulation to eventually fail, due either to lily-livered regulators or the failure of politicians to provide the requisite regulatory tools. It’s the Australian way. Bear that in mind when you hear MPs debating how to respond to the crisis in investment banking.