One thing you can always count on is that as geographic scope of businesses and finance grow, someone will call for the harmonization of the relevant legal and regulatory structures. Roger Ehrenberg blasts that familiar horn today, calling for "common regulatory frameworks" in order to minimize regulatory arbitrage and cut down on the "immense friction [involved in] operating regulated businesses across markets due to different rules and standards.” Felix Salmon applauds him, and calls for even more of the same. Somehow this is meant to be a lesson from our current credit crisis.
This is a terrible idea. Competing, conflicting regulatory frameworks may not be as efficient as an ideally-designed comprehensive system but it avoids many of the mistakes and oversights of the kind of harmonized regulatory framework we are ever likely to get. The availability of exit and avoidance, experimentation and local checks on corruption and capture are under-rated sources of regulatory strength. A harmonized system with do away with the nimbleness we praised earlier, and there’s little reason to suspect we’d get a system better able to catch abuses, fraud, waste and errors than that we have now. Less abstractly, if none of the regulators saw our current credit crisis coming, how would having a common framework have helped them avoid it?
We wrote about this ages ago in the context of European takeover law, and what we said still applies: let a thousand regulatory regimes bloom.
What has the Credit Crisis Taught Us? [Information Arbitrage]
Dreaming of Regulatory Cooperation [Portfolio]
Posted by Roger, Jan 29, 2008 7:54PM
John, you are dude in general but on this issue you are dead wrong IMHO. Playing "regulatory bingo" and "let's shop for a jurisdiction" are common games that ultimately lead to very poor outcomes.
When you say "none of the regulators saw the credit crisis coming," what exactly do you mean? I'd argue that it was broken accounting rules (allowing SIVs to grow as big as they did, largely off-balance sheet) and a lack of clarity around fiduciary standards that were precursors of the meltdown. To me the single biggest regulatory failure was the ability of the rating agencies to expand unchecked, especially given their implied (if not explicit) fiduciary role in the financial markets. This was a regulatory breakdown that simply should not have occurred. Might it have been different if the leading regulatory bodies had looked at the explosive growth in the markets together?
Don't you think that a set of regulators charged with overseeing a multi-trillion dollar market while balancing economic rationality with investor protection would come up with a better solution than a single body, especially in light of the high degree of interdependence amongst the global markets? Country-specific issues can certainly be dealt with on an intra-country basis, but the benefits of creating a common set of rules that governs the vast majority of transactions and interactions among entities are enormous. In any event, just one man's opinion. Have a good eve.