This from Ezra Klein touched off a conversation on Twitter that wound up focusing on the general issue of regulatory discretion in the financial regulation bill. One standard criticism of the bill, which I do agree has some force, was that it entailed too much regulatory discretion. Regulators, however, are prone to “capture” or just being appointed by crappy presidents. Better to have hard and fast rules. And, indeed, sometimes it is.
But it’s worth saying that there’s no hard and fast rule in favor of hard and fast rules. After all, the only thing people like less than undue regulatory discretion is too many stifling bureaucratic rules. Specifically, one problem with doing away with regulatory discretion is that regulated firms have a large interest in coming up with ways to comply with the letter of the law while gutting its spirit. Properly motivated regulators faced with firms exploiting loopholes or engaged in regulatory arbitrage can formulate new rules to enforce the principles that congress charged them with upholding. If, that is, congress left them plenty of discretion.
Alternatively, you might just be faced with new problems or new information. Almost every liberal I know who thinks it’s bad that the FinReg bill contains so much discretion is also very happy that the Environmental Protection Agency is going to be regulating greenhouse gas emissions. If the Clean Air Act had been drafted so as to deny EPA bureaucrats discretion and had instead proscribed specific regulations on specific substances, it would’ve have mandated regulation of greenhouse gases. But since Congress wrote a principles-oriented law, a regulatory finding that sources of CO2 emissions generate air pollution that endangers public health or welfare is sufficient to generate action. And it will be much harder for the fossil fuel industry to get the Clean Air Act partially repealed than it’s been for them to block new climate legislation.
All of which is to say that if there’s a flaw in the Obama administration’s approach to this it’s that I’m not certain they’ve paid enough attention to building high-quality regulatory institutions. The basic idea of writing a law that depends on the creation of such institutions is correct, but it’s hard to pull off in practice. That’s one reason I’m more regulation-skeptical than most progressives. But there are key areas where robust regulation is indispensable and in those areas there’s no good alternative to the hard work of institution-building.