American Madness

Intelligent Criticism in the Service of a Better Nation

Self-funding regulation:
Another stupid idea

Posted by Josh Friedlander | 2 Comments

Response to Top Securities Lawyers Call for Self-Funded S.E.C., in which it is stated that “Forty leading securities lawyers urged Congress on Friday to allow the S.E.C. to keep the hundreds of millions of dollars in fees it collects each year and use them to support its operations”:

We select among a series of bad options. An externally financed bureaucracy leaves its leadership with perverse incentives to enhance their power by pushing for more staff and resources. This is, at best, only slightly correlated with the task with which the agency is tasked. A self-financed agency arguably has a worse incentive structure: Imagine telling the police that their salaries will be a function of whatever tickets and fines they can collect? Some will say that there should be no agency at all and people will have to protect themselves. That is clearly suboptimal (like, uh, having no police force!). Or: eliminate sector-specific regulatory agencies and meld them into a general justice department (fraud is fraud, right? Or is it?). There seem to be no good answers. I prefer Temple Grandin’s solution to regulation (in her case as applied to the cattle slaughter industry): Set clear rules and deal with violations. So, if we don’t want cows falling down on their way to slaughter, we institute a rule that slippery floors are forbidden and we define slippery as X cows falling in a given period of time. What we don’t do is say: You must have a floor no more than one degree from perfect flatness, that adheres to XYZ-level of friction, and so on. We don’t tell people how to achieve compliance, we simply define compliance based on outcomes. Clearly, there will differences of opinion as to how one defines compliance in financial services, but I’d rather have an outcome-based regulatory structure than one in which the SEC wanders around with a stick in one hand and a coin jar in the other. This proposal sounds like ancient French tax collection practices that involved eyeballing people’s possessions and that resulted in the French having a weird fetish for blinds on their windows (some apartments in Paris have retail store-type metal gates on the windows…even those facing out on locked gardens from several stories up!). Turn each regulator into a tax collector and you encourage enormous opacity.


2 Responses to “Self-funding regulation:
Another stupid idea”

  1. mike
    June 16th, 2010 @

    the last time I checked retarded didn’t mean stupid. did something change or are you still demeaning people with special needs.

  2. Josh Friedlander
    June 21st, 2010 @

    Fair enough, Mike.

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