An important new book about the financial crisis just came out:
Guardians of Finance: Making Regulators Work for
Us, by James R. Barth, Gerard Caprio Jr., and Ross
Levine. They argue that a major reason the financial crisis was so
severe was that regulators behaved badly. Their solution: a
regulatory Sentinel. This group of independent, impartial overseers
would watch over regulators and keep them in line. In short,
regulators need regulators.
Regulators exist in the first place because markets are
not perfect. The trouble is, neither is regulation — the economist
Harold Demsetz called this regulatory apologia the Nirvana
fallacy. Regulators can be captured by business interests, and
often are. Suits in Washington often lack the specialized,
dispersed local knowledge that they need to make the right
decisions. Agencies regularly prioritize expanding their budgets
and missions over consumer welfare. That’s why Barth, Caprio, and
Levine, at least in the financial sector, make the case for
regulatory Sentinels.
The trouble is that those Sentinels are subject to the
same mortalities as regular regulators — industry capture, the
knowledge problem, internal turf wars — so they are unlikely to
prevent another financial crisis. As the Roman poet Juvenal put it,
“Quis custodiet ipsos custodies?” Who will watch the
watchers?
There’s an easy solution: Sentinels for the Sentinels. Of
course, that might not work, either. The Sentinels’ Sentinels will
need their own Sentinels. And so on, in an infinite
regress.
There is an upside to this doomed scheme. According to any
politician worth his salt, the three most important economic
problems of our time are jobs, jobs, and jobs. A CBS/New York Times
poll conducted last week found that 51 percent of Americans believe
the most important problem facing this country today is “economy
and jobs.” The nearest competitor, “other,” polls at 22
percent.
President Obama has unveiled bill after bill aimed at
creating high-tech jobs, green jobs, construction jobs, health care
jobs, you name it. The Republican candidates’ stump speeches focus
overwhelmingly on their plans to lower unemployment. But their
proposals are uniformly timid. Spend some money here, cut taxes a
bit there, and you have sure-fire plan to accomplish… nothing,
really.
Neither party seems to realize that Sentinels offer the
path to full employment. Here’s my proposal. Remember that infinite
regress argument from a few paragraphs back? Sentinels will need
their own Sentinels to keep them in line. But those Sentinels will
need their own Sentinels. The Sentinels’ Sentinels will need
Sentinels, too. And on to infinity — an infinity of jobs! Every
last man, woman, and child who wants a job can get one as a
Sentinel.
This wouldn’t do much to improve the quality of
regulation, or to prevent future financial crises. That would
require more transparent cost analysis for all new rules, purging
old and obsolete rules from the books, and
a host of other measures. But this is an election
year. Those proposals don’t fly with voters. They want jobs, now.
Since Washington seems intent on preventing private sector job
creation, Sentinel jobs will have to do.
