Todd Suomela's Library tagged reform →  View Popular

It is unlikely that consumers will ever hold much influence over the realities of the financial regulatory process because they are not organized in comparison to the financial industry, which concentrates significant resources in the creation of inefficient regulators. By and large, consumers are not well-informed about what they have at stake in the regulatory process and, even if they were, that would not be the sole determinant of how they define themselves politically.

Adding another layer of guards to guard the existing guards ultimately results in an infinite regress. I do not think it is cynical to suggest that, absent an actual paradigm shift with respect to accountability in the financial industry, we are just going to have more of the rent-seeking that has gone on to date and the economic calamities that ensue. For my part, I would propose opening up financial regulation to a small group of social entrepreneurs. Let people establish for-profit companies that can compete for government contracts to stress test the holdings of financial institutions independently and audit their records.

In return, Megan McArdle showered him with contempt. Her post began with a spectacularly telling dismissal. The interview, she snarked, was part and parcel of "Ezra Klein's obsession with experts." I should go talk to some drug industry executives, she advised.

It's the experience of talking to ideologues on both sides of this issue -- some of them industry employees, others activists -- that has actually led me to rely so heavily on, well, actual experts. But McArdle's rebuttal isn't premised on interviews with a different class of experts. Rather, she's relying on a mixture of basic economic theory and intuition. The product, as you might imagine, isn't terribly responsive to Avorn's arguments. "I am completely unsurprised to find out that Dr. Jerry Avorn has completed no work in economics," she writes in her concluding paragraph, "and indeed, so far as I can tell, no work in anything except being a professor of medicine."

So does Tabarrok -- or McArdle -- know as much as Avorn does about the pharmaceutical industry? Of course not. Neither of them is a health economist. Neither of them, to my knowledge, has worked at a pharmaceutical company. Neither of them has had sustained contact with the drug industry. Nor is medical innovation a subject that's dominated by economists. It's something that requires some knowledge of, you know, medicine, and the interactions between public and private research divisions, and the FDA process, and all the rest of it. Economics is a useful discipline. But it's not a decoder ring. And it's not a substitute for discipline-specific knowledge. That's why Tabarrok read Avorn's book, which he called "excellent."

McArdle elides this by spending a lot of time explaining how companies work to Dr. Avorn. Almost all of her post relies on spinning Avorn's comments as if they were about pharmaceutical companies, rather than about whether high reimbursement rates for pharmaceuticals is the most cost-effective spur to further innovation. It's quite a performance.

Specifically,  Lawrence H. Summers and  Timothy F. Geithner are arguing against putting large banks through the bankruptcy and restructuring procedures advocated by some senior Federal Reserve officials (see the  Congressional testimony of Thomas Hoenig on Tuesday). If major banks fall in this way, the Treasury Department and the White House point out, this will cause irreversible damage — after all, once a bank has been restructured, it can never be the same again.

As a result, Mr. Summers and Mr. Geithner prefer forbearance for banks — i.e., look the other way on big banks’ problems and hope an economic recovery brings them back to sustained profits (on this, the latest news is not so positive). And to encourage a recovery, the White House is seriously contemplating further huge fiscal stimulus. If that doesn’t work, Mr. Summers and Mr. Geithner reason, they can always take big financial institutions through bankruptcy later.

An alternative strategy would be:









1. Minimize risks of failure by resolving problems in a transparent manner — which is a nice summary of President Obama’s strategy in spheres other than banking — and by reducing debilitating uncertainty.
2. Incur some immediate costs to set the country on a sound footing for the near future. If it is at all politically possible to take decisive action, do so. This is known in the administration as Rahm’s Doctrine, but it is not being applied to banks.
3. Don’t push more costs onto future generations. The United States is going to be competing with low-debt, low-tax nations for the next century. To protect our national interests this country cannot afford to be too indebted.

But the right metaphor is not breaking productive machines, or peasants with pitchforks, or even the poor vs. the rich.  It’s as if the organizations running the nuclear power industry had shown themselves to be stupid and profoundly dangerous.  You might wish to abolish nuclear power, but that is not a realistic option; storming power plants makes no sense; and the industry has captured all regulators ever sent after them.

The technocratic options are simple, (1) assume a better regulator, of a kind that has never existed on this face of this earth, (2) make banks smaller, less powerful, and much more boring.