The Spectacle Blog

Taleb on Blinder, and the Business of Regulatory Arbitrage

By on 8.5.10 | 11:34AM

Writing in the Huffington Post, Nassim Nicholas Taleb recounts an offer he received from Princeton professor and former Federal Reserve vice chairman Alan Blinder. Essentially, in Taleb's story, Blinder proposed regulatory arbitrage: Blinder knew of a way to game the system and offer accounts that provided deposit insurance -- then limited to deposits under $100,000 -- for any size account. "In other words," Taleb writes, "it would allow the super-rich to scam taxpayers by getting free government sponsored insurance. Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge."

Reflecting on this experience, Taleb draws some conclusions about our current regulatory environment:

First, the more complicated the regulation, the more prone to arbitrages by insiders. So 2,300 pages of regulation will be a gold mine for former regulators. The incentive of a regulator is to have complex regulation.

Second, the difference between letter and spirit of regulation is harder to detect in a complex system....

Third, regulation, like drugs, has side effects, and like drugs, it can harm the patient.... People do not mention that regulation helped promote the Value-at-Risk method of risk measurement in replacement to age-tested heuristics -- these methods blew up banks.

Fourth, we need a more severe monitoring of the activities of public officials and a solution to the following conflict. In African countries, government officials get explicit bribes. In the United States they have the implicit, never mentioned, promise to go work for a bank at a later date with a sinecure offering, say $5 million a year, if they are seen favorably by the industry. And the "regulations" of such activities are easily skirted.

These are lessons to keep in mind whenever you hear news about the authors of health care reform leaving Congress to become lobbyists or former insiders like Blinder praising massive government interventions and thousand-page bills with innumerable provisions

Send to Kindle

Like this Article

Print this Article

Print Article