By Lawrence A. Hunter on 8.7.08 @ 12:07AM
Unfortunately, the Bush administration thinks it's the problem.
As a frustrated Al Pacino complained in The Godfather Part
III, "Just when I thought I was out, they pull me back
in."
And he wasn't even in the insurance business!
Government modernizers, until recently, seemed ready to inject a
modicum of regulatory competition into an industry barred from the
same option enjoyed by banks -- choosing between state and national
chartering and thus getting to decide who regulates them.
State regulators, operating under a New Deal-era system, have
prevented a national insurance market from developing, in the
process leaving consumers no means of selecting products regulated
by authorities other than their own state insurance
commissioners.
Aware of that system's defects, the Bush administration inserted
an "optional federal charter" provision into its comprehensive plan
for sweeping consolidation and realignment of responsibilities in
financial services regulation. So far, so good.
Then, in a recent Financial Times opinion piece, New
York Federal Reserve Bank president Timothy Geithner declared it
was time to fold the tent on regulatory competition in financial
services and to erect instead "a unified regulatory framework to
govern the global financial system."
The only competition Geithner chose to note in his article was
"competition in laxity," amid a "confusing mix of diffused
accountability, regulatory competition, and a complex web of rules
that create perverse incentives and leave huge opportunities for
arbitrage and evasion."
Suddenly the "optional" part of the administration's "optional
federal charter" proposal began to resemble a mere stepping stone
away from mandatory state chartering and toward mandatory national,
or international, chartering under a unified regulatory system --
without competition of any sort.
All it may take is an insurance crisis brought on by
ill-conceived state regulatory policies to set off a rush to
regulation by a single national authority.
To say the very least, this wouldn't constitute progress.
FASCINATING POLITICAL questions arise.
* Will the threat of state regulatory
monopolies yielding to national or international regulatory
monopolies finally unite a divided insurance industry to fight off
a common threat? Or will insurance companies and agents continue to
fight among themselves over means and ends?
* Will a segment of the insurance industry,
eager to get out from under the thumbs of 50 state regulatory
tsars, reconcile itself to the loss of optional federal charter
status and embrace instead a national, or even international,
regulation entity?
* Will, by contrast, contending factions within
the insurance industry ally themselves to maintain a state
insurance charter as a live alternative for companies by supporting
regulatory competition and optional insurance chartering?
The answers matter far more than casual observers of the
industry might suppose.
A single bureaucratic regulator inclines, unsurprisingly, not to
the public's interest but to its own. Indeed, that's long been the
complaint about the state insurance commissioners, who have
prevented a national market for insurance from developing. When
state regulators control prices and terms within their own
jurisdictions, companies have no option for relief from excessive
and ill-conceived regulation short of abandoning doing business
there.
On the other hand, if regulators at different governmental
levels are required to compete -- as under an optional chartering
system -- businesses can hold regulators accountable by choosing
which to be governed by.
WHERE THERE is a system of true interstate competition among
regulators, as opposed to a feudal system of regulatory fiefdoms, a
national market emerges. Consumers will hold regulators accountable
for their policies by purchasing products from companies governed
by consumer-friendly regulators -- wherever those products
originate.
Until the recent banking crisis, there was widespread consensus
that the regulatory competition created by optional bank chartering
had served consumers well. Predictably, politicians are using the
banking crisis as an excuse to expand their power.
Worse, perhaps, politicians and bureaucrats are using fallacious
arguments against regulatory competition as a way of avoiding their
own responsibility for the current crisis, which was caused by the
worst monetary policy since the Great Depression.
Regulatory competition isn't the problem; it's an immense and
important part of the solution.
topics:
Business
