Regulators: Not smarter, just different by mattsteinglass
June 11, 2008, 3:36 pm
Filed under: Economics | Tags: ,

With regard to the general sense that we need more regulation and better regulators of investment banks to avoid future crises, Megan asks:

But the fundamental question that no one ever answers is simply “How will the regulatory agency be any smarter than the banks?”

As usual I tread these waters with trepidation — I am the kind of person Megan refers to who is generally favorably disposed towards more regulation of investment banks but has no idea whatsoever what form such regulation should take. But it seems to me that this question is to some extent misguided. The point of regulators is that they are different from investors because they approach markets as neutral arbiters, who don’t stand to profit from any proposed instrument. They counterbalance banks not because they are smarter than banks, but because they don’t stand to personally or organizationally make any money if an instrument turns out to generate money, so their assessments are not colored by the tint of hypothetical lucre. Of course banks’ desires (to roll around in piles of freshly minted bills) are partially counterposed by their fears of risk (ending up standing on the corner wearing a pickle barrel selling pencils), but that’s still not the same as being impartial and financially uninterested. Judges are not smarter than lawyers, and basketball referees are not smarter than players or coaches. They’re necessary not because they’re smarter but because they are unbiased.


3 Comments so far
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