Tuesday, January 5, 2016

Regulators Need a Better Defender: Joseph William Singer's "No Freedom Without Regulation"

I came across this book on one of my journeys through the library shelves.

I’m not familiar with Singer or his work.
Turns out he’s not a real stylistic writer, but he does get his point across.

Markets are structures of human interaction.

And they’re good.

What’s interesting about this book is that it takes the argument on from the right, trying to convince people who are nominally anti-regulation to the pro-regulation side. I picked up this book as a firm believer in the necessity to yoke the invisible hand.

I just don’t feel he did. I think the core of the book is the end of chapter three, as Singer is summarizing - “Laws prevent us from making demands of each other that should not be made in a democratic society that treats each person with equal concern and respect” (93). Basically I read this that regulations are in place to prevent the race to the bottom that I see in capitalistic markets and what I imagine is the end-point of the libertarian dreams, a war of all against all. So we take this premise, but it is argued with huge blind-spots and counter-arguments that aren’t addressed.

I have to get on one of my particular hobby horses here, but Singer uses the subprime crisis as the central point (It’s right there in his subtitle) showing that if we would have had more and more effective regulation, the subprime crisis wouldn’t have happened. I kept waiting for him to mention the ratings agencies. He mentioned them once.

No matter your viewpoint on the crisis, these middlemen failed - they didn’t verify the riskiness of so many derivatives and they helped create demand and all that made banks and originators make loans to people that shouldn’t have gotten that sort of credit. It was this failure that to me was the crux of the whole problem They are private companies that exist to look at financial products and tell the outside world how good those products are.  They are private, but several of them have been written into laws, so that some institutional funds, for example, can’t buy products that are risky. The ratings agencies say something is bad, and they can’t buy it - and vice versa.

This means that there were regulations in place that could have stopped it, but the enforcers of one part of the system failed and then boom. (None of this exonerates mass failures of supervision at the Federal Reserve, the SEC, or the Comptroller of Currency, I just think this part is missed too often). What this means is that the regulations have to be in place and they have to work and be supervised by indifferent regulators - in terms of having no conflicts.

A parallel issue is regulatory capture. The way the incentives work, a lot of people at the agencies that are regulators will move to the private sector after their stint of supervision is over, This is not just congressmen becoming lobbyists, but it is also Justice Department lawyers going to big polluters or SEC professionals taking their turn on the street. If you have people watching the game who will join the game in a lucrative manner, the incentives as a human are to maybe go just a bit easy on these people, this time.

These are real issues, and to pull back for a moment, as a fan of regulations, Singer doesn’t hit on them. I think he’s more worried about how they work in theory, but there are very real implications to how they work in practice.