Despite all the huff and puff commentary about the dangers of complex financial innovation, a far more real threat to our economy has proved to come from complex regulations. And the problem of regulatory complexity has only become worse thanks to the plethora of programs produced in an effort to prop up the banking system.
One worrying sign of the growing complexity of financial regulation is the size of a recent volume produced by a top New York City law firm. Davis Polk has brought forth a 260-page report titled A Guide to the Laws, Regulations and Contracts of the Financial Crisis, our sister site–Law Review—reports. It is aimed at “anyone who wants to understand the flurry of new legislation, old law used in new ways, contracts with Treasury, press releases, frequently asked questions, guidelines and other rulemaking that has occurred at a dizzying speed over the last year and a half as a result of the financial crisis.”
To a large extent, our financial crisis was driven by a still largely invisible regulatory crisis of complexity. No one seems to have understood how decades of SEC protection of credit rating agencies would mix with anti-discrimination housing rules and Basel capital rules to produce calamity. Rules crafted to address very different problems by completely different groups at different periods collided in highly unexpected ways to disastrous effect.
Does anyone know what the unintended consequences of the new rules and programs issued during our crisis might be? Does anyone understand how these rules will interact with those already in place? Has anyone even tried to figure out how likelly future rules to protect consumers will interact with them?
We suspect the answer to all three questions is NO. If it takes one of New York’s top law firms 260 pages just to tell us what the new rules are, it’s a good bet we haven’t even begun to explore the unintended consequences and unexpected interactions with other rules.
Unfortunately, we’re not yet even at the apex of complexity. Financial reform schemes will almost certainly make the situation more complex while regulators and policy makers continue to be ignorant about the risks they are creating. But perhaps we have this advantage going for us: those of us who have closely watched the way regulations produced our crisis can at least anticipate that the problem is getting worse and a future crisis is surely in the making.