Real Regulators

by on December 24, 2008 · 32 comments

Don’t miss Jim Harper’s excellent post on the strange way people have responded to the failures of regulation on wall street. In a Meet the Press exchange, we learn that people reported Bernie Madoff’s suspicious books to the SEC, which chose not to do anything about it. And it was agreed around the table that the Madoff affair debunks “the idea that wealthy individuals and ‘sophisticated’ institutional investors don’t need the protection of government regulators.” “There’s no question we need a real regulator,” says CNBC’s Erin Burnett.

The problem is that we had a “real regulator.” Ponzi schemes and dishonest bookkeeping are already illegal. Had the SEC been so motivated, it had all the authority it needed to investigate Madoff’s books, discover the problems, and shut his firm down. In a rational world, this would be taken as a cautionary tale about the dangers of assuming that regulators will be vigilant, competent, or interested in defending the interests of the general public rather than those with political clout. Instead, we live in a bizarro world in which people believe that the SEC’s failure to do its job is an illustration of the need to give agencies like the SEC more power.

We of course see the same sort of confusion in debates over regulation of the technology sector. For example, the leading network neutrality proposals invariably wind up placing a significant amount of authority in the hands of the FCC to decide the exact definition of network neutrality and to resolve complex questions about what constitutes a network neutrality violation. Too many advocates of regulation seem to have never considered the possibility that the FCC bureaucrats in charge of making these decisions at any point in time might be lazy, incompetent, technically confused, or biased in favor of industry incumbents. That’s often what “real regulators” are like, and it’s important that when policy makers are crafting regulatory scheme, they assume that some of the people administering the law will have these kinds of flaws, rather than imagining that the rules they right will be applied by infallible philosopher-kings.

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