Here John Boehner (ht to my brother) says:
“I think it’s time for Congress to do its Constitutionally–mandated duty to hold agencies accountable for what they do and they don’t do. And as part of that, we probably ought to take a real serious look at how regulators regulate.”
“We have the most adversarial regulatory system in the United States, than almost anywhere in the world,” Boehner argued. “When you look at how the Germans do it and some others, it’s a collaborative process. We all want clean water, we all want clean air, we want to take care of our employees. But it’s an adversarial relationship that just gets heated up an heated up, and we need to look at what that relationship really ought to look like.”
Matthew Yglesias adds:
Then he offers Romer’s Corollary: “Every decade or so, any finite system of financial regulation will lead to systemic financial crisis.”
That’s exactly why I think it was misguided to criticize Dodd-Frank for relying on regulatory discretion rather than being entirely rule-based. A rule-based system would guarantee you no crisis for a while, but ultimately it presents a fixed target for canny bankers to exploit and undermine. Discretionary systems may well fail, especially if our politics remains dysfunction, but they offer the only hope we have.
Fascinatingly, both commentators are wrong about how regulators work.
Let’s start with Boehner. The time for Congress to hold agencies accountable was about 80 years ago. The ship has sailed. How does he suggest holding agencies accountable? Freezing pay for a year or two at some agencies? Congress has a now 80 year long track record of demonstrating that: 1) it has no desire to hold agencies accountable and 2) it has no idea how to do so. If Congress wanted to pass a bill to hold a regulatory agency accountable it would have no choice but to ask employees of that agency for assistance in writing such a bill!
It so happens that I work regularly with two German financial regulatory agencies (i.e. wholly-owned subsidiaries of Deutsche Bank). Their regulatory process is indeed not adversarial. Among the US financial regulatory agencies that I work with, some are just as captured as the German ones and some are less captured.
As Europe has become more integrated, their regulatory processes have become more accommodative. Germany’s regulators, for example, will go to great lengths to ensure that their companies do not operate at a competitive disadvantage to the companies of other European countries. Unfortunately, this situation is bad for everyone other than large firms. Boehner’s suggestion will lead to more TARPs, not more jobs, as it’s perfectly geared toward protecting large firms.
Let’s move on to Yglesias. A regulatory system that relies on regulatory discretion only works if the regulators are properly motivated. Post-financial crisis, financial regulatory agencies were given more powers by Congress, people were promoted, salaries were increased, etc. The incentives are completely backwards. As I said above, US regulatory agencies do not work in an adversarial manner with those they regulate. In addition, a quick perusal of Dodd-Frank will also show that any regulatory action requires agreement among approximately 8 different regulatory agencies – something which has never happened.
In short, we return to my theme: agencies are not responsible therefore giving them power is a bad idea.