Who will regulate the regulators who regulate the regulators?
An important new book about the financial crisis just came out: Guardians of Finance: Making Regulators Work for Us, by James R. Barth, Gerard Caprio Jr., and Ross Levine. They argue that a major reason the financial crisis was so severe was that regulators behaved badly. Their solution: a regulatory Sentinel. This group of independent, impartial overseers would watch over regulators and keep them in line. In short, regulators need regulators.
Regulators exist in the first place because markets are not perfect. The trouble is, neither is regulation -- the economist Harold Demsetz called this regulatory apologia the Nirvana fallacy. Regulators can be captured by business interests, and often are. Suits in Washington often lack the specialized, dispersed local knowledge that they need to make the right decisions. Agencies regularly prioritize expanding their budgets and missions over consumer welfare. That's why Barth, Caprio, and Levine, at least in the financial sector, make the case for regulatory Sentinels.
The trouble is that those Sentinels are subject to the same mortalities as regular regulators -- industry capture, the knowledge problem, internal turf wars -- so they are unlikely to prevent another financial crisis. As the Roman poet Juvenal put it, "Quis custodiet ipsos custodies?" Who will watch the watchers?
There's an easy solution: Sentinels for the Sentinels. Of course, that might not work, either. The Sentinels' Sentinels will need their own Sentinels. And so on, in an infinite regress.
There is an upside to this doomed scheme. According to any politician worth his salt, the three most important economic problems of our time are jobs, jobs, and jobs. A CBS/New York Times poll conducted last week found that 51 percent of Americans believe the most important problem facing this country today is "economy and jobs." The nearest competitor, "other," polls at 22 percent.
President Obama has unveiled bill after bill aimed at creating high-tech jobs, green jobs, construction jobs, health care jobs, you name it. The Republican candidates' stump speeches focus overwhelmingly on their plans to lower unemployment. But their proposals are uniformly timid. Spend some money here, cut taxes a bit there, and you have sure-fire plan to accomplish… nothing, really.
Neither party seems to realize that Sentinels offer the path to full employment. Here's my proposal. Remember that infinite regress argument from a few paragraphs back? Sentinels will need their own Sentinels to keep them in line. But those Sentinels will need their own Sentinels. The Sentinels' Sentinels will need Sentinels, too. And on to infinity -- an infinity of jobs! Every last man, woman, and child who wants a job can get one as a Sentinel.
This wouldn't do much to improve the quality of regulation, or to prevent future financial crises. That would require more transparent cost analysis for all new rules, purging old and obsolete rules from the books, and a host of other measures. But this is an election year. Those proposals don't fly with voters. They want jobs, now. Since Washington seems intent on preventing private sector job creation, Sentinel jobs will have to do.