So why do people think we’d do better under a single, systemic regulator?
As we’ve shown, there’s almost no evidence for this proposition. But there’s also nothing that really counts as thinking behind it either. It’s voodoo, magical thinking.
The idea is that dividing authorities creates opportunities for regulatory arbitrage and regulator shopping. The conceit is that competing regulators irrationally compete against each other for clients, increasing the overall risk of the system. These regulators are forced by the incentives of the system to adopt inadequate regulations because they are, after all, just flawed human beings like everyone else.
So far, that’s fine. The magical part comes next.
The idea is that if we had a single regulator, it would be immune to industry capture, omniscient, and effective, would exercise sound judgment, and be trustworthy.
Does that seem likely?