Financial Regulation: An issue ripe for listening

Why should we talk about financial regulation?  It may seem to be a technocratic process that most of us can safely ignore.  It also requires real learning and effort to have an educated discussion about banks, broker-dealers, and asset managers and how the government oversees their operations and business.

Moreover, differing views about regulating financial institutions and markets often stem from differing views on fundamental issues of political and economic philosophy.  Questions of whether markets or political decision making do a better job of allocating resources and whether self-interest or disinterested expertise leads to better financial decisions lie at the heart of many regulatory debates.  The combination of complexity and deep philosophical division make it hard for non-specialists to participate in the discussion.

But the issues are so important that everyone’s participation is essential.  Financial regulation affects the rates we pay on credit cards, automobile loans and home mortgages, the way we save for educational expenses, retirement, and rainy days, and ultimately economic growth and job creation.  It matters to every one of us.

My starting assumption is that the decentralized decisions of individuals trying to provide for themselves and their families are imperfect—sometimes disastrously so—but still on average better than centralized decisions made by government agencies.  Others begin from the assumption that markets fail frequently and in ways that systematically disadvantage the less affluent and sophisticated, making government intervention a normatively and practically effective strategy.  Can people coming from these different places listen to one another constructively?

The critical starting point is to recognize that each shares the goal of making people, particularly the least sophisticated and politically connected, better off.  Regulatory skeptics like me should concede that there is a serious and important concern that too little intervention will systematically disadvantage small savers and investors.  Regulatory proponents should be willing to consider the possibility that well-meaning rules will have unintended consequences that may harm the very people they are intended to help.  Both sides should recognize that the other’s concerns stem from a coherent and good-faith account of the way the world works, even if they don’t share it.  Arguments premised on the notion that those who disagree have a hidden agenda are a decision not to listen.

Going from the general to the specific, it would be useful to focus on the relative, rather than absolute, need for regulation of different activities and institutions.  What problems are most worthy of government intervention and which are least worthy?  For example, I think we could get widespread agreement that a broker lying to a customer about a product she is selling is a bigger problem than a broker requiring customers to agree to arbitrate disputes rather than litigating them.  Some believe both practices should be the subject of government prohibition; others believe only the first should be; a few would argue that even the first can be left to the discipline of a competitive market.  But it is hard to argue that the second practice should be regulated while the first shouldn’t.  Although we will disagree on where we draw the line between government intervention and non-intervention, it is still useful to array the problems on a scale from most to least serious.  We might even discover that those generally skeptical of regulation and those generally in favor of it have a much larger area of consensus, both about what should be regulated and what shouldn’t be, than they may have assumed.

Paul Mahoney, Dean of University of Virginia School of Law
April 2016