The Animal Spirits of Regulators
Over at National Review Online, Kevin Williamson makes a good point about the motivations of financial-sector actors and regulators:
The fallacy implicit in the conventional argument for more robust financial regulation is that animal spirits—the whole menagerie of greed, panic, pride, thrill-seeking, irrational exuberance—distort only profit-seeking activity. But they are at least as likely to distort efforts to regulate profit-seeking activity. In truth, the animal spirits of regulators probably are more dangerous than those of Wall Street sharks: Competition and the possibility of economic loss constrain players in the marketplace, but actors in the political realm have the power to compel conformity and uniformity among those under their jurisdiction. The entire economy is yoked to their animal spirits, and the housing bubble was a consequence of that fact. We have bred an especially dangerous hybrid creature in the "too big to fail" private corporation, the bastard offspring of a union between Wall Street's animal spirits and Washington's….
Which isn't to say that the regulatory enterprise is inherently hopeless: There are better and worse regulations, and there are more intelligent and less intelligent applications of them. But our legislators and regulators are much more likely to be swayed by their resentment of Wall Street paychecks than by well-reasoned analysis of our present regulatory defects, and we will solve "problems" such as CEO pay that are not, probably, problems.
