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When something is regulated by the government, the nature of that regulation is subject to being influenced by the regulated. If the regulator itself had compe

When something is regulated by the government, the nature of that regulation is subject to being influenced by the regulated. If the regulator itself had competition and participation in the regulatory scheme was voluntary, there would be real pressure to honestly regulate. The government could, instead of regulating companies itself, manage a system of competing regulatory regimes and let people decide which one they trust. There could be a "Good Housekeeping Seal of Approval" for accounting competing with FASB, companies could pick one and then publish to investors which one they adhere to. If investors find that they are consistently burned by companies governed by FASB, they would start to favor companies governed by the alternative. There would be real pressure to perform honestly over the longterm that a monopoly is not subjected to. In technology, we have all sorts of competing standards that live and die by how good the results are. Competition is a good thing and we need more of it, especially in government.

eru 17y ago
Yes. That's also a good argument for pushing for power from the federal to the state level. (And for having a federal system, or really small countries in the first place.)
- stretchwithme 17y ago
  Amen. Actual, the competitive situation I described is already in place to a degree. Companies can go public in a different country, which many are doing since the oppressive sarbanes oxley regulations went into effect.
dpatru 17y ago
Government has been defined as a group of people that claim the exclusive right to initiate force against others in a particular area. Government and competition don't go together.
- stretchwithme 17y ago
  Governments compete all the time. If you don't like the way California incorporation works, you can incorporate in Delaware. Even better is the way the Swiss do it. If you don't like the canton you're in, you and your neighbors can join a different one or start your own. It rarely happens, but the fact that it can keeps government responsive. Of course, decisions there are mostly done by referendum anyway, so its hard for government to get far from the people.
mschwar99 17y ago
Aren't the rating agencies a counter example of the success of this model? They have proved that private market "over-site" is just as susceptible to influence of the regulated. A flavour of this idea already exists inside the government and it has lead to a race to the bottom not increased accountability. Large corps are free to choose whom their primary regulator is. Interesting take on from This American Life on the effects of the Office of Thrift Supervision's efforts to market themselves to businesses as a regulator. http://www.thisamericanlife.org/radio-archives/episode/382/The-Watchmen http://www.thisamericanlife.org/radio-archives/episode/382/T...
- stretchwithme 17y ago
  Thee's definitely some truth to that. And debt issuers are paying for their own ratings. I think, though, that perception of risk is highly distorted by bubbles. Its the success of risk takers that's convincing everyone else to buy and join them in taking even greater, but misperceived risks. But the rating agencies still give all different kinds of debt different ratings. Not every bond is getting rated AAA. Plenty get a junk rating as well. And with government and quasi-government Fannie and Freddie encouraging unreasonable lending and hiding risk through repackaging, it doesn't surprise me risk was hidden even from these agencies. But I don't know if misperception of risk is quite the same problem as regulators being influenced to ignore questionable practices.
jtbigwoo 17y ago
How would this work? Ok, so the decision is announced and there are three big regulators on the government list, "Toughy Inc.", "FASB" and "Wimpy Co." Here's how your scenario would play out with the big tech companies: Microsoft announces that they've chosen Wimpy to preserves their ability to innovate. IBM announces they've chosen Wimpy so that they can continue to be responsive to their customers. Google implies they wanted to choose Toughy but were forced to choose Wimpy by the competitive environment. HP chooses Wimpy and mentions something about being founded in a garage in California. Apple chooses the iconoclastic boutique regulator WimpyTwo. (WimpyTwo prints their standards on much nicer paper.) Every other tech company chooses Wimpy since it's obvious the market has spoken. Toughy Inc. lays off most of their staff. Five years later it's revealed that upper management at Microsoft were including their giant egos as depreciable assets. The executives of Microsoft and Wimpy Co. are hauled before Congress and claim that nobody could have forseen what would happen, besides everybody was doing it, it was legal at the time, and it was the work of a few bad apples. A few mid-level executives get fired. WimpyTwo grows considerably and some former employees of Wimpy Co start Softie, LLC. Toughy Inc is never seriously considered since it's a niche player.
trominos 17y ago
This is pretty close to not having any regulation at all. The problem is that investors don't get "consistently burned" by companies with bad practices, they get inconsistently burned. And people are so bad at appropriately estimating and valuing really rare events that, if the burns are infrequent enough, investors will choose options that don't maximize their expected outcome. Leading, in some cases, to disaster. Note that this wouldn't happen in an ideal market where 1) everybody's perfectly rational and 2) everybody pursues strategies of maximizing their long-term expected finances. But it happens in real life. That's one of the major problems with the financial system as it stands, and (ostensibly) a powerful argument that regulation of some sort is a good idea.
- stretchwithme 17y ago
  There problem with government regulation is that people get inconsistently burned. And that seems a consistent problem with government regulation. There were plenty of people pointing out the bad practices of Enron, Madoff, AIG, but nobody was listening. Politically driven regulation is incented to not rock the boat. They have no brand to protect. And when the shit hits the fan, they'll just keep pushing the ultimate consequences into the future, because they control the Fed and the Treasury and everything. There is no accountability. No one ever gets fired. No one's perfectly rational. But we are not perfectly irrational either.
MaysonL 17y ago
Yeah - look at how well that's turned out in banking where the FDIC, OTS, OCC, and Fed are competing to run things. </sarcasm>

eru 17y ago

Yes. That's also a good argument for pushing for power from the federal to the state level. (And for having a federal system, or really small countries in the first place.)

stretchwithme 17y ago
Amen. Actual, the competitive situation I described is already in place to a degree. Companies can go public in a different country, which many are doing since the oppressive sarbanes oxley regulations went into effect.

dpatru 17y ago

Government has been defined as a group of people that claim the exclusive right to initiate force against others in a particular area. Government and competition don't go together.

stretchwithme 17y ago
Governments compete all the time. If you don't like the way California incorporation works, you can incorporate in Delaware. Even better is the way the Swiss do it. If you don't like the canton you're in, you and your neighbors can join a different one or start your own. It rarely happens, but the fact that it can keeps government responsive. Of course, decisions there are mostly done by referendum anyway, so its hard for government to get far from the people.

mschwar99 17y ago

Aren't the rating agencies a counter example of the success of this model? They have proved that private market "over-site" is just as susceptible to influence of the regulated. A flavour of this idea already exists inside the government and it has lead to a race to the bottom not increased accountability. Large corps are free to choose whom their primary regulator is. Interesting take on from This American Life on the effects of the Office of Thrift Supervision's efforts to market themselves to businesses as a regulator. http://www.thisamericanlife.org/radio-archives/episode/382/The-Watchmen http://www.thisamericanlife.org/radio-archives/episode/382/T...

stretchwithme 17y ago
Thee's definitely some truth to that. And debt issuers are paying for their own ratings. I think, though, that perception of risk is highly distorted by bubbles. Its the success of risk takers that's convincing everyone else to buy and join them in taking even greater, but misperceived risks. But the rating agencies still give all different kinds of debt different ratings. Not every bond is getting rated AAA. Plenty get a junk rating as well. And with government and quasi-government Fannie and Freddie encouraging unreasonable lending and hiding risk through repackaging, it doesn't surprise me risk was hidden even from these agencies. But I don't know if misperception of risk is quite the same problem as regulators being influenced to ignore questionable practices.

jtbigwoo 17y ago

How would this work? Ok, so the decision is announced and there are three big regulators on the government list, "Toughy Inc.", "FASB" and "Wimpy Co." Here's how your scenario would play out with the big tech companies: Microsoft announces that they've chosen Wimpy to preserves their ability to innovate. IBM announces they've chosen Wimpy so that they can continue to be responsive to their customers. Google implies they wanted to choose Toughy but were forced to choose Wimpy by the competitive environment. HP chooses Wimpy and mentions something about being founded in a garage in California. Apple chooses the iconoclastic boutique regulator WimpyTwo. (WimpyTwo prints their standards on much nicer paper.) Every other tech company chooses Wimpy since it's obvious the market has spoken. Toughy Inc. lays off most of their staff. Five years later it's revealed that upper management at Microsoft were including their giant egos as depreciable assets. The executives of Microsoft and Wimpy Co. are hauled before Congress and claim that nobody could have forseen what would happen, besides everybody was doing it, it was legal at the time, and it was the work of a few bad apples. A few mid-level executives get fired. WimpyTwo grows considerably and some former employees of Wimpy Co start Softie, LLC. Toughy Inc is never seriously considered since it's a niche player.

trominos 17y ago

This is pretty close to not having any regulation at all. The problem is that investors don't get "consistently burned" by companies with bad practices, they get inconsistently burned. And people are so bad at appropriately estimating and valuing really rare events that, if the burns are infrequent enough, investors will choose options that don't maximize their expected outcome. Leading, in some cases, to disaster. Note that this wouldn't happen in an ideal market where 1) everybody's perfectly rational and 2) everybody pursues strategies of maximizing their long-term expected finances. But it happens in real life. That's one of the major problems with the financial system as it stands, and (ostensibly) a powerful argument that regulation of some sort is a good idea.

stretchwithme 17y ago
There problem with government regulation is that people get inconsistently burned. And that seems a consistent problem with government regulation. There were plenty of people pointing out the bad practices of Enron, Madoff, AIG, but nobody was listening. Politically driven regulation is incented to not rock the boat. They have no brand to protect. And when the shit hits the fan, they'll just keep pushing the ultimate consequences into the future, because they control the Fed and the Treasury and everything. There is no accountability. No one ever gets fired. No one's perfectly rational. But we are not perfectly irrational either.

MaysonL 17y ago

Yeah - look at how well that's turned out in banking where the FDIC, OTS, OCC, and Fed are competing to run things. </sarcasm>