A Poor Workman blames his Tools

In following the debate around financial regulation it appears to me that there are two main hurdles to overcome which will occupy center stage without really dealing with the root of the problem.

The first obstacle is the Free-Marketeers. They profess an adherence to an Adam Smith that most of them have never read compounded by their allegiance to Milton Friedman which is used to support an agenda of greed bridled only by the occasional bout of fear that is forever lurking in the marketplace. For these people there is no debate about regulation-they would remove all regulation, everywhere, if given the chance.

They realise that the world of no regulation only exists in an extreme state when political, social and economic upheaval occurs such as in Chile after Allende, Russia after Glasnost, and perhaps Iraq after the Second Iraq War, so in all other instances their response is to clamor for self-regulation.

I am somewhat dumbfounded at this blatant ploy of self-serving self-righteousness. Watch any sport and imagine there were no referees or umpires. Every player knows the rules, and yet even in the presence of officials they continually break the rules-aka fouling-and yet I have yet to hear of anyone suggesting that a game of football should be played without a referee.

Why should we expect the players in the world of finance to act differently?

The second obstacle is the pursuit of the perfect system of regulation- as if there were one. Searching for a Fail-Safe System implies absolutes. I would maintain that outside of death and taxes there are no absolutes-and I am sure there are any number of arguments that would debate even this.

But look at the debate on financial regulation. At its' most basic level and yet apparently of the gravest importance is the question as to what structure should the regulator have. Should there be separate regulators that specialise in various sectors? Should there be a single agency which integrates all of the sectors? Should there be one agency for safety and soundness and another for business conduct and consumer protection? Should there be an institutional approach which separates banks, broker-dealers, insurance companies etc. and places them under their own regulator? How do we manage states versus federal jurisdictions, or national versus international or even multinational?
And of course, should there be a hybrid system which takes the best from all?

I don't know that there is any one right structure. I do know that the current system allows institutions to shop around to find the regulator that best suits their needs. This might be deemed to be clever by the perpetrators. I also know that the institution and the individuals responsible at such institutions should indeed be viewed as perpetrators and be held to account and that does not mean merely a slap on the wrist.

I believe the single biggest failure of the current regulatory system is that it is very difficult to separate the gamekeepers from the poachers. Everybody has an angle, and their motto seems to be: "Separate the Fools from their Money".