Aretae thinks that my take on regulation is wrong. Here’s his argument:
- Ideal regulatory systems can be modeled as games.
- Regulators *try* to solve problem by creating regulations.
- The regulated participants *try* to circumvent regulations by following the letter of the law, avoiding the intent.
- In any system where there is enough money involved, there is no contest…the regulated participants necessarily win.
- Letter-of-the-law regulation is therefore *guaranteed* to fail in high $ industries like finance.
- This is a big problem, insofar as we can agree that an unregulated finance industry is undesireable.
As he seems to know, the biggest problem with this line of reasoning is point #2. There’s no reason to believe that regulators try to solve problems by creating regulations. Kling knows this, see here, for an example of regulators openly supporting (and endorsing!) their own rules being arbitraged. Giving regulators scope to make rules more flexible exacerbates this problem.
Point #4, therefore, also makes no sense. The contest isn’t necessarily between regulated vs regulator. Regulator and regulatee are often on the same side, as Kling has pointed out.
Point #5 is problematic, since “letter-of-the-law” regulation doesn’t exist in the modern government. Again, when legislative and executive and judicial powers are combined in the same entity, it’s meaningless to speak of letter of the law regulation. One entity is judge, jury and executioner (and law-maker and policeman) – and they’re essentially unaccountable to anything. If your theory of regulation misses these points, it doesn’t get off the ground.
My take is that arguing about “forms” of regulation misses the point. The regulatory structure is so far removed from what most people assume that their suggestions just don’t make sense. You need to work with the existing structure (i.e. make regulators accountable for specific failures) or blow up the structure. Everything else misses the point.
It’s also worth pointing out that PBR isn’t a new idea. It was all the rage in the UK before the crisis. If you want to know how that worked out, ask Northern Rock.
Foseti 
Aretae is so adorable.
Aretae occasionally betrays a childlike faith in the superhuman incorruptibility and good intentions of people who work for the government. I think it’s because he likes to try to reduce complex phenomena to little standardized intellectual ball bearings that line up nicely in numbered lists. Last time I caught him doing that, I stopped reading him for good (iirc he was admiring David Brin or some other leftish SF writer who had a theory about how 50,000 unaccountable bureaucrats are much more attuned to reality and responsive to customers’ needs than an equal number of businessmen, because there are just as many of them, and they have “solemn laws” telling them what to do instead of those nasty incentives. No really, he said that).
Huh.
Aretea is an anarcho capitalist who has been against government in nearly every single thing he says.
But only as long as that government won’t shut up about freedom, equality, justice, and other easily re-interpretable concepts.
This discussion is confusing to me the more I think about it and I think there are two reasons.
1. Obviously the premise is that we don’t have the salient features of “PBR” already, and in practice, I’m not sure that’s correct. At least, if I have read your blog correctly, it doesn’t seem to be.
2. No one can or will explain to me how “PBR” would work or what it would even mean in specific cases like the Volcker Rule, or capital requirements, that are (presumably) the reason for bringing this up in the first place.
Given 1 and 2, “PBR” just seems like a recipe for vague-ifying the regulatory structure we already have. I’m having a hard time following the argument for doing so.
I agree with both your points. We already have PBR – even if only de facto. Check that UK link for their views on how it worked.
Foseti,
#2 I often try to help companies arbitrage rules when the rules are stupid. I am trying to solve problems, but sometimes the problem is the rules congress comes up with (because politics is dumb).
#4 Yes, when sellout is profitable. Fix the sellout problem.
#5 Agree, though perhaps with a different conclusion?
(i.e. make regulators accountable for specific failures)
Makes some sense but can also be dumb. The best thing about regulation is the job security. It takes job security to feel confident enough to take on the bad guys. If you get rid of the job security you get a lot of cover your ass busywork. If anything, you get increased regulation. In the secure scenerio, I let companies slide on ticky tac rules. In the insecure scenerio, I spend all day following the “letter of the law” with little care to whether it makes sense or not, because I can’t get fired for following the “letter of the law”.
I hate PBR. I don’t know why Hipsters drink that cow piss.
I’m very amused by the notion that the recent financial troubles were because banks were “under-regulated,” or that the existing regulation is somehow suboptimal, and that the writing of more profound and wiser laws is somehow a solution. Foseti, tell me, if you took all the relevant laws, regulations, and important court precedents and printed them out into a hard-bound book on microfiche, could you kill a goat by smacking it in the head with this book in a single blow, or would you simply be unable to lift it?
I don’t think you could lift.
Most of them would also have principles-based provisions in them (which I’ve never seen used by any agency)
Simply get a crane, and drop the tome on the poor helpless caprinid.
There is an imbedded abstract philosophical issue here that comes up in discussions of Constitutional Law – especially those provisions related to Criminal Procedure.
There is an inherent and, I would submit, irresolvable tension between two things we want the law to be. One the one hand, there is the principle of “Reasonableness”, one of the principle bases of our tradition of Common Law.
The way to define reasonableness is first, to contrast it with it’s opposite “Dogmatic”, and second to say, “Taking all relevant matters into account, there is a point at which you could change the degree of a factor so much it would change your decision”.
You can imagine this mathematically, with a “holding” being a function of many variables, the derivative of the holding with respect to each relevant variable always being nonzero. Built into the notion are the concepts of judgment, balance, and cost-benefit analysis. The “reasonable” answer to any hypothetical question is always, frustratingly but appropriately, “it depends”.
On the other hand, there is the need of human organizations engaged in legally complex fields (for instance, the police) for the predictability of “bright-line” rules. These agents can’t operate in a “it depends” or “let’s get a legal opinion for every choice we make” or “you better hope your sense of judgment matches the judge’s when this goes to court” world. They need to know what they can or cannot do, and where the limits are. Ordinary individuals either need immunity to operate with a large amount of (abusable) discretion, or they need to be trained with standard operating procedures and rules of engagement which spell out specifically how they are to behave. Occasionally the law provides Constitutional bright-lines (the exclusionary rule is a good example), that give the police the rules they desire, but often deliver net-negative social results and injustice (that is, they are often “unreasonable”).
I submit that there is just no way to reconcile these two legitimate desirable properties, and that any system we come up with will have to make trade-offs. A “leginomic” (?) theory of where and how to optimally make those trade-offs would be nice to have, but I haven’t read anything convincing in that direction.
One could argue that if we lived in a world where the reasonable interpretations of the law by judges and juries were fairly uniform and consistent, then our agents would have their predictability and could tolerate “principle-based regulations” without being terrified by uncertainty over unpredictable and potentially ruinous legal liabilities.
Having a system of jurisprudence which constrains whim and bias, reliably preserves reasonableness, and yet also provides similar predictability to bright-line rules should be the goal of all legal systems. Alas, we don’t live in that world.
Try this Hayek piece.
Relevant quote:
These ideas have to be treated very carefully. Bear in mind the Moldbuggian perspective:
In other words, the rule of law and equality before the law, as discussed by Hayek in his piece, are essential to civilisation and work wonderfully just as long as one accepts that one cannot expunge human judgement from government entirely – “the law” is an abstraction, and ultimately there must be a sovereign human with “arbitrary whims” in charge of things at the highest level, potentially willing to break the law or “natural law” at his discretion if needs be.
The discussion of PBR is well within this “Newtonian envelope”, so Hayek’s piece and the quotes therein are most apposite. However, mixed into the piece is this mistake of which Moldbug speaks, the failure to accept the limitation on the domain of the rule of law and equality before the law.
tl;dr: the wisdom of ages suggests that the law should be as specific and bright-line as possible.
The regulatory structure is so far removed from what most people assume that their suggestions just don’t make sense.
Mr. Foseti— I know you have explained how it all really works™ in bits and pieces over the time, but I do not seem to be able to recall whether you happen to have a nice post summarizing the really-existing regulatory structure and its workings. I believe this would make for interesting reading for quite a lot of people besides me.
I second this request. You need to do a monster post Aretae-style of The Big Picture (TM).
More so than this?
Competition is the only trustwrothy principle of regulation. Ambition against ambition, in defect of “better” motives.
So, with what should we do to replace regulation?
I know, let us punish those who murder others through deliberate pollution, gross incompetence, and all the other typical idiocy with the same severity with which we punish someone who steals $300 from the fast food register.
That kinda means the CEO of BP has to go to jail for the oil rig disaster in the Gulf.
Oh, that isn’t acceptable is it? When you say “no regulation” that is actually code for “do whatever they want, kill whoever they want”.
You are a hero. Why oh why don’t people trust you?
PS:
Please amuse me by explaining how God appeared before you and gave you a vision that the BP Oil spill was “just an accident” and no one is at fault. And no one is at fault for the clean up either!
No trial needed! GOD gave you a vision!
Go on, say it.Why oh why don’t people trust you?
And no, I don’t need God to know:
A.Drilling can normally be done without such catastrophes…. so somewhere someone messed up.
B.Drilling like that is very dangerous and WILL result in such catastrophes…. and skippie lied about the risk…
C.Skippie never even thought about the risk cause that’s what socializing costs is all about!
Nobody mentioned God, visions or oil spills in this thread until now. There’s no grounds for asking anyone to explain any such thing. We do not exist as strawmen for your amusement.
Well, I’m afraid when discussing the need for regulation, one needs to discuss the actual problems regulation is trying to prevent.
You know, like the oil spill.
Or you know, offer a solution.
Which you also don’t do.
Except of course, those brave and noble rich people need to do WHATEVER THEY WANT.
Since you let them dismantle the country while staring out into space like an imbecile, this is not that surprising.
No, the problematic assertion isn’t point #2, it’s point #1. “Ideal regulatory systems” can only be modeled as _fantasy_.
Any office whose holder is implicitly assumed to be honest and public-spirited will immediately become disproportionately attractive to those among us who are least inclined to honesty or public spirit.
The only way to keep people from cheating is to make cheating unattractive. Punishment after the fact is not effective, simply because it’s easier to combine the cheating they’re already doing with subournation of the authorities responsible for administering punishments. Anything else requires the presumption that we’re to be governed by angels, rather than men.
“Well, I’m afraid when discussing the need for regulation, one needs to discuss the actual problems regulation is trying to prevent.
You know, like the oil spill.
Or you know, offer a solution.
Which you also don’t do.
Except of course, those brave and noble rich people need to do WHATEVER THEY WANT.
Since you let them dismantle the country while staring out into space like an imbecile, this is not that surprising.”
BP was at the top of the Obama campaign bundling list. This is an example of a company, widely known in the industry to be the least competent at its business and the most competent at mining regulators, attemping to drill a field under the shield of regulation. As Bastiet would have asked, who regulates the regulators? The fact is, BP’s liability is limited by regulation. This is a fool’s game, Whatever, and you are a tool.
#6
If we had an unregulated financial market, when goldman sacs or any other financial institution screws up, as a customer, an investor can take thier money and invest somewhere else, bankrupting them for thier transgression. In our happy regulated financial market, when goldman sacs screws me over, I take my money away, goldman buys senators and regulators to pass laws that take my recently freed money away from me in taxes and gives it back to them to stimulate the economy. Only now, goldman has my money and I no longer can take it away from him, and he still screws me over.
Which ones better again?? Wall street faces NO consequences for thier fraud and theft. NONE. So why would they care about any “regulations” when they know they wont be enforced anyways?
MF global stole BILLIONS of customer funds this last year. Where are the arrests? Where are the show trials? Where are the regulators calling for heads on pikes? Where is the anger in the press? Hmm?? oh right, they were under “regulations” so that obviously what happened ( the theft ) COULDNT have happened ( via regulation), so it DIDNT happen( CYA policy at work). Welcome to government regulation.
PBR is delicious