Sunday, September 14, 2008

Financial regulation

There are two views of regulation. One, which I often hear these days, is that the regulators have failed, so let's get new and better regulators. This seems to be one view of OFHEO, the Fannie Freddie regulators. But that runs into the other view, that it's a fool's errand.

Public choice economics contributes to the latter view. In today's NY Times, Tyler Cowen writes "Too Few Regulations? No, Just Ineffective Ones ... the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it."

I cannot tell whether this is the proverbial third way. Legislators enact all kinds of things and worry about implementation and enforceability later, if at all. That's the nature of the beast. It is unclear that they'll ever get the regulatory part right. In the Fannie/Freddie case, it had to fail. Effectively regulating a highly politicized agency is not even in the cards.

So we are left with Job #1. Depoliticize these things. The jury is still out on whether after almost 100 years, we finally have a depoliticized Federal Reserve.