On regulators from the left and the right

Here John Boehner (ht to my brother) says:

“I think it’s time for Congress to do its Constitutionallymandated 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.

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13 Responses to On regulators from the left and the right

  1. Rob Sherwood says:

    Great post. Makes me want to go re-read James Burnham.

  2. Saying it’s a bad idea to give them power because they’re not responsible seems to imply that if they were more responsible, more power would be warranted. If I believed this, then I’d probably believe that all the salary increases, promotions, and so forth are the way to go: get better/smarter/more responsible people in there, and all will be right!

    I would say, rather, that no such group of humans could have the appropriate knowledge to do what it is fantasized regulators are being asked to do (prevent crises, etc.). I have the distinct impression that a lot of their efforts, in fact, are bent towards sustaining and developing this fantasy, rather than actually fulfilling it. (Which would, after all, be impossible)

    My preferred approach would involve going back and asking, in this or any other situation, why do we think we need ‘regulators’ at all? What are they trying to ‘regulate’ or prevent, and is there some other way to prevent it – or avoid its cost in the first place?

    This may not work for many fields of government regulation (bridge safety, and so on) where it seems that regulation is needed and unavoidable. I do think it should work for finance however. I honestly still can’t for the life of me understand exactly what it is that financial regulators think they are accomplishing with anything that they do, request, ask for, insist, enforce, impose, etc.

    P.S. And don’t get me started on “Basel”…

    • Foseti says:

      Generally, I agree. However, it would be hard to get more smart people into the agencies, given that you can’t get rid of the existing ones.

      I also think regulators often do more harm than good by putting a stamp of approval on existing practices. Nevertheless, if the incentives were structured properly, you could have a much more effective system than the one we have now.

      • The problem is that (in my view) proper incentives would almost by definition have to point in a direction where less or no regulations are needed; and if that were attained, regulators would have no jobs. In this way, an employed financial regulator having the proper incentives is almost a contradiction to me. 😉

    • josh says:

      I presume if they were responsible they wouldn’t want this kind of power.

  3. Handle says:

    So, is there anything (short of full Neocameralist reformation of government) you could suggest that would help make agencies marginally more accountable. Any baby steps that would improve things in the short run – or is that fundamentally impossible?

    • Foseti says:

      Good question. Honestly I don’t know. I think you have to make it possible to fire federal employees. I also think that funding for agencies should be tied to success is some way. I have no idea how to make this happen. Frankly, I’m not hopeful.

      • Handle says:

        Would across-the-board prohibition of public-sector unions at the federal level have any substantial impact?

      • Foseti says:

        It couldn’t hurt. I’m not really sure since it’s impossible to imagine a non-unionized federal workforce. I think the Democratic Party would have to be destroyed before that could come about anyway.

  4. […] – “Who is Free in 21st Century America?“, “Gender Roles“, “On Regulators from the Left and Right“, “Game, Set, Match: HBD“, “Can You Free a […]

  5. […] Sherwood, occasional commentator at Foseti’s, and webmaster of The Mencken Society… or maybe it was The Mencken […]

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