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Optimum Regulation

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Neo-neocon is musing about the debate over the role of regulation in our financial turmoil:

Conservatives and libertarians tend to be on the “it’s the fault of too much regulation” side of the question. Liberals tend to be on the “it’s the fault of too little regulation” side.

Who cares? Well, the blame game is always fun. But the more important reason we should try to understand what happened is that, in trying to design solutions, it helps to know how we got here.

The solution, according to most conservatives? Less regulation. The solution, according to liberals? That’s easy: more, and throw in a lot more government intervention as a whole—why not?

Setting aside the contest over which regulations—and regulators—deserve more scorn, I suggest we debate our ideas behind regulation itself. The better we understand our mutual and conflicting aims, the more likely we will find acceptable regulatory implementations.

Without developing a comprehensive philosophy, I offer two thoughts:

First, any regulation must be effective. There’s no point in making rules that cannot or will never be followed. Hidden costs and unintended consequences are even more infuriating when the promised benefits and intended results are not realized.

Second, any regulation must include the reasonable promise of full and complete enforcement. Good rules that we do not apply are not rules at all. This implies that the cost calculation in drafting a regulation should provide for universal monitoring of those subject to the reg, and complete prosecution for those found in violation.

I extend these notions to all laws enacted by governments. For example, if driving faster than some speed is a violation, we must punish all those who exceed the limit. No selective enforcement, no warnings no excuses. We are all supposed to be equal under the law. If the government cannot treat us blindly and equally, then government should not meddle in that particular affair.

Anticipating a first objection to my radicalism, I offer that common law can still operate. A speeder can be assessed damages as a tortfeasor, or compelled to pay a contractual fine, without being made a criminal. I hold government law to a different standard than voluntary civil arrangements made between persons.

Back to the financial world, if we’re going to have regulation, let’s have enforced and effective regulation, with some insulation from meddling politicians. I think it would be possible to fully enforce securities rules, if such enforcement was made a priority.

This might require deleting a maze of exceptions and special preferences to make the rules more plain. Simple rules are easier to understand. The better we understand the rules, the more likely any one of us will spot violations or corruptions. Some stuff may happen which we don't like, though. I accept that as part of the cost of fairness.

In essence, my notion for optimal regulation is not unlike that of the King from The Little Prince:

"If I ordered a general to fly from one flower to another like a butterfly, or to write a tragic drama, or to change himself into a sea bird, and if the general did not carry out the order that he had received, which one of us would be in the wrong?" the king demanded. "The general, or myself?"

"You,"said the little prince firmly.

"Exactly. One much require from each one the duty which each one can perform," the king went on. "Accepted authority rests first of all on reason. If you ordered your people to go and throw themselves into the sea, they would rise up in revolution. I have the right to require obedience because my orders are reasonable."