Oxymorons Among Us
Remind your government
decision-makers what good regulation should look like: First,
do no harm. Second, find the real problem.
The financial crisis has prompted us to take a hard look at
how our financial institutions are regulated both locally and
internationally. As policymakers debate how regulators could
help prevent future crises, we have an opportunity to think
about what makes good regulation.
I know what many of you are thinking: Good
regulation—isn’t that an oxymoron? Since many
analysts agree that the financial crisis was in part a failure
of regulatory oversight, it’s worth talking about how to
make regulation more effective and less burdensome.
When I was in graduate school, my economics professor argued
that it was more efficient to give the poor cash than food
stamps and let them decide how best to spend it. I know, I
know. The argument has its flaws, but so does a system in which
draconian rules stifle innovation and efficiency.
To provide some guidance on “good regulation,”
the international Organization of Economic Cooperation and
Development (OECD) last year developed a document called
“Policy Framework for Effective and Efficient Financial
Regulation.” Although the paper is directed at regulating
financial institutions, the principles can be applied to any
Here are a few of the OECD principles (policymakers and
regulators, take heed):
First, what is the problem?
Perhaps this is stating the obvious, but you would be surprised
(or not) how often decision-makers plunge in without clearly
understanding the problem. There should be clear evidence of
the nature of the problem and its magnitude (and why it has
become a problem). If the problem isn’t understood and
clearly articulated, the solution will miss the mark.
Is government action
justified? This is a biggie for industry and certainly
should be for taxpayers. Any government action should be based
on clear evidence that the action is justified, based on a
realistic assessment of whether government action would be the
most effective solution.
Is regulation the best form of
government action? A comparison should be made of the
different regulatory and non-regulatory policy mechanisms
available and their costs and benefits. Regulators also need to
assess the administrative costs of any options on government
Is there a legal basis for
regulation? All regulations should rigorously respect
the rule of law. Regulations should be authorized at a higher
level (i.e., a legislative body) and should be consistent with
treaty obligations and relevant legal principles, such as
certainty, proportionality and applicable procedural
What is the appropriate level of
government action? Should regulation take place at the
highest level of government or at a lower level? When more than
one government body is involved, is there a coordination plan
to avoid gaps in regulation? (Can you say credit default swap?)
Do the benefits of regulation justify
the costs? This is the $30 billion question, one often
ignored by policymakers. Does the cost justify government
regulation? The benefits of regulation should justify the
Is the distribution of effects across
society transparent? The beneficial effects of
regulation should be clear.