Regulation Is Not Fungible
November 20, 2011 7 Comments
Comments here have reminded me of one of my biggest pet peeves in finance commentary: In many peoples’ minds, the cliff’s notes version of The Financial Crisis™ can be summarized by one thing, not enough regulation. End of story!
Mostly this implicitly bespeaks a lazy view of ‘regulation’ as if it is fungible: no one ‘regulation’ is really distinguishable from any other (more specifically, we’re all just too lazy to speak/think about any single regulation in particular, and we think that’s fine and shouldn’t prevent us from spewing our uninformed lazy opinions). You just draw (or put back) some undifferentiated blob of regulations from the Great Regulation Vat Of The Universe. As such, the only thing ever worth discussing is how much ‘regulation’ you have at any given time. The assumption that goes hand in hand with this one is the notion that ‘regulation’ and ‘bad things happening’ are mutually exclusive. After all, regulations are supposed to prevent bad things! That’s what they’re for! Thus, if a Bad Thing happened, it automatically follows that there wasn’t enough ‘regulation’, and the way to stave off future Bad Things, is of course More Regulation.
With these axioms, clearly the only thing to ever ponder or discuss in the face of some legislative or other proposal (after some Bad Things happened) is: Is it a regulation (or would it increase regulations)? If so, then it must a good idea and only evil people would argue against it.
Obviously this sort of idiocy doesn’t merit even the amount of brain cells I’ve already thrown at it, but it’s particularly noxious coming from people discussing the financial sector, because when it comes to finance, to apply these assumptions (let’s call them the Fungibility Assumption, and the Regulation/Bad-Thing Exclusion Principle) makes it especially clear that such people don’t know what the f**k they’re talking about.
So as fair warning let me just admit that anyone who opines on the financial sector and claims it “isn’t regulated enough” has marked themselves as a phony moron in my mind. I’m sure I could be convinced that there need to be some different or other regulations, but ‘more’ is not a synonym for this, and in any event you still need to individually defend any given regulation on its merits to be making an actual point. But keep in mind that I am here to state that the financial sector is, right now, probably the most fascistically- and hugely-regulated industry on earth (the rivals in my mind being military and perhaps health care). Indeed, I sincerely believe that, under current regulation, essentially no one working in the financial sector in any nontrivial capacity fully knows (or could possibly know) the entirety of the rules and regulations that apply to them, and virtually any person working in finance could be plausibly arrested and charged with this or that crime or violation. In any given case, it’s really only a question of whether the government feels like it (and has the bandwidth).
But of course, when I complain about this state of affairs, and point out that it violates the concept of Rule Of Law to the core, all the ‘regulation is fungible’ people get confused and alarms go off in their head. After all, I sound like I’m arguing for Less Regulation!
No. I’m arguing for whatever regulation there must be, to be sane regulation. I would prefer clear and purposeful laws, with an identifiable connection between means and ends, with a logical connection between the alleged problem they are meant to solve when argued for, and the actual effect they would have. For the Rule Of Law, in other words.
I know, I know. Dream on.
You say:
No. I’m arguing for whatever regulation there must be, to be sane regulation. I would prefer clear and purposeful laws, with an identifiable connection between means and ends, with a logical connection between the alleged problem they are meant to solve when argued for, and the actual effect they would have. For the Rule Of Law, in other words.
Altogether obvious and reasonable and desirable. As you say, dream on.
I will move comments in the other thread here.
First, I don’t know your background. You complain about things from the perspective of someone in the business (think of all the cost of this regulation, whine whine whine). If you truly aren’t a member of the financial sector and still hate regulation, then your about as lost as you can get. At least the people I knew getting rich of their hypocrisy had a reason, if your just a wannabe that is pretty bad.
You also missed the entire point of my reply. If you think the Volcker rule is too complicated, not strict enough, has flaws XYZ, etc then propose changes. Don’t through the thing out because your afraid it has flaws, fix them. If your afraid that banks usually outwit regulators, make regulations strict, simple, and draconian.
What makes regulation hard today is the belief that what wall street does is in any way valuable. It isn’t. None of the financial innovations in the last 20 years have any value to society. So if you pass a scorched earth regulation, or regulation makes it to hard to the street to write business and they decide, say, they aren’t going to trade the third derivative of some made up financial instrument anymore because the regulatory burden is too high, that’s a good thing! And that’s coming from a former derivatives quant who knows everything we did was a bunch of bullshit. My job shouldn’t have existed. At all. Not in a different capacity, not with smart regulation, not at all.
So we are coming at this from totally different perspectives. Your worried about regulation not being perfectly calibrated, I don’t much care. Because I’m not afraid of stepping on any flowers in this garden, its all weeds. If we were talking about regulating something that actually mattered, like a real fucking company building real fucking things that world actually needs, I think you’d have a case. But we are talking about the street here. Which, outside a few basic functions they had 40 years ago that make up maybe 20% of their business today doesn’t serve any function.
Of course, I would say instead that I’m complaining about things from the perspective of logic and reason and concerned citizen.
But it doesn’t matter. Even if I am some sort of shifty, evil financial sector person with a gigantic personal stake who ‘hates regulation’, you still need to address what I’m actually saying on its merits rather than engage in speculative ill-informed ad hominem in order to be making a real argument for/against something. Ditto for whether what ‘Wall Street does is valuable’; this doesn’t matter to any real argument over whether a given regulation is a good idea.
You say that if I think the Volcker Rule is a mess I need to propose changes, not throw the thing out. I disagree. The Volcker Rule is a new law (effectively). I am observing that it is a twisted piece of crap and pointing out (bad) effects I think it will have (note, the main bad effect I have pointed out is that it will create too many jobs for useless overdegreed people at the expense of other people). To my mind, that is enough of an argument that it shouldn’t be put through. It is simply not true that when one has identified a crappy law they need to ‘propose changes’ to morph it into an ok law or shut up. The ‘change’ I propose to the Volcker Rule is not to have a Volcker Rule as I do not think there are good reasons for it nor that the explanations offered in favor of it add up; I don’t even accept the basic premises put forth (such as, that ‘prop trading’ can be cleanly separated or distinguished from other trading) for the supposed need to have a Volcker Rule in the first place.
If you wanted to try to dispute me, one way to do this would be to actually look into what the Volcker Rule is, get more informed about it than I am (it’s not like I am an expert), and put forth an explanation for why I am so wrong about how much it sucks, what its effects will be, etc. Since by your own admission you don’t know the first thing about the Volcker Rule (besides its intent, i.e. you know it’s ‘to ban prop trading’), this option is unavailable to you, so I don’t know what exactly you’re trying to do here,
I do know however that you have thrown out a bunch of non sequitur, irrelevant arguments and generic problems you think exist and have on your wish list of ‘things to fix in finance’ that betray a lack of understanding of what I’m even trying to say or what regulation is actually on the table. In some cases there is a gigantic disconnect between the things you cite as being problems with the financial sector and what the Volcker Rule is intended to fix. Basically I’m having an exchange with a person who has been putting for ‘arguments’ like this (essentially);
step 1. LTCM went bankrupt
step 2. ????????
step 3. Therefore, the Volcker Rule must be a good idea, so shut up
or
step 1. You ‘come from the perspective’ that what Wall Street does isn’t valuable.
step 2. ????????
step 3. Therefore, you ‘don’t care’ if the Volcker Rule – which you know nothing about – is bad.
What am I meant to do with these ‘arguments’. There is no logical way to connect the dots here between 1 and 3. I am talking about banking regulation and you bring up a bunch of non-banks. I am talking about a regulation supposedly to ban prop trading and you state that you think the big problem with the banking sector is banks giving hedge funds leverage, which even if true, what does that have to do with it. I point out actual problems and effects (in my opinion) with the regulation I’m talking about and you say you haven’t read it and don’t know what it is but I still need to ‘propose changes’ to it rather than ‘throw it out’.
What can I say but, I disagree and I would throw it out, for the reasons already stated. But do feel free to let me know if/when you ever wish to make a real argument against what I am actually saying.
Best,
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