Why Would Anyone Want To Be A Regulator?

facebook offices, before conference room

One of the most basic problems with the belief that more or better regulations will prevent future financial crisis is the fact that almost all regulations are useless if the right people aren’t enforcing them.

Simple mental test: If regulators, 10 years ago, had had perfect knowledge of how things would unfold, do you think they could have prevented the crisis, given the tools at their disposal?

Almost certainly.

So unfortunately, you need good regulations, good regulators and a way of ensuring that you’ll always be able to recruit good regulators down the road. At the moment, there may be a flock of bright-eyed brilliants running to Washington, hoping to make a difference, but it doesn’t help much if in 10 years they all move to the private sector, and the next generation are a bunch of normals.

Felix Salmon passes along a depressing story about the people who work for the FSA, the UK’s principles-based regulatory body.

Basically, the well-known quant Paul Wilmott told a story about a magician doing a deck-of-cards trick that involved having an audience member pull a card out of a shuffled deck. Wilmott asks what the odds are that the card is Ace of Hearts.

You can’t answer the question, because you don’t know the trick, but you know that the answer isn’t 1-in-52, because it’s a magic trick and a magic trick leaves nothing to pure chance. The regulators to whom Wilmott told the story stubbornly insisted that 1-in-52 was the only answer, demonstrating the narrow-mindedness of their thinking, something that doesn’t work very well if your job is to be pro-active and creative in identifying risk.

(The question reminds us of question we heard when we were younger: If you flip a coin 100 times and it’s always heads, what are the odds that it’s heads on the 101st attempt? Anyone who says 50-50 just doesn’t get it)

It’s worth asking though whether a government regulatory body can ever attract the right people. Plenty of folks have proposed paying regulators more than the salary of a typical bureaucrat (could you imagine having been at OFHEO, while your counterparts at Fannie and Freddie were hauling down huge bonuses?).

But even lucrative pay may not be enough. It’s got to be something cultural. People who are creative thinkers are going to want an environment that suits them, and in fact many of the people who would be “right” for the job, would be willing to take a job that pays less, but which is more stimulating. With all the opportunities out there for brights, what will attract them to government work.

From time to time, you might get someone truly outstanding to lead an agency, but one leader at the top can’t do it. You still need a rank and file of people who will work anonymously without much hope for recognition. Good luck on that.

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