Regulation's efficacy and methods are not a mystery buried in some ancient tomb. It consists of little more than channeling people’s most utilitarian behaviors. Regulators can basically choose to punish, award, or charge the actors in the marketplace to reach their regulatory objectives. Rather than regulate under the assumption that every market actor will try to please the regulators by behaving obediently and with a conscience, most people choose to believe punishment and proper enforcement are more expedient.
While I am not attempting sanctimonious irony here, human beings know what the right things are to do rather than actually doing the right things. We know enforcement mechanisms are the foundation to an effective regulatory agency, we just can’t stop promulgating lengthy rules while at the same time collectively ignoring how to make sure those rules are adhered to. And such problems are even more serious in the financial regulatory perimeter. More complicated, lengthy, and annoying regulations usually mean we are now facing a “regulatory malfunction” problem. The Dodd-Frank Act itself is at least a voluminous 800 pages (the pages vary in quantity depending on what version you choose), let alone the pages of rules that all the financial regulators in the United Stated are required to propose under this Wall Street Financial Reform Bill.
I am not trying to argue whether those rules will really be effective and adhered to, but I just can’t help wondering whether the market actors or even the regulators themselves know exactly how to follow suit without first establishing a sweeping and powerful supervision and enforcement mechanism. The most powerful and almighty watchdog in the United States, the SEC, doesn't even know how to pressure the courts to ferret out those greedy financial rogues guilty in their hundreds of criminal charges. Well, we know it is hard to distinguish whether an apparent breach of conflict of interests should constitute a fraud or "just" gross negligence in a civil procedure context, but that doesn’t means we shall always tolerate a scenario that in almost 100% of the cases can be settled with monies that is essentially the aforementioned rogues’ criminal gains.
I call such settlements as a form of taxation, that the SEC used to direct or channel the way the market actors behaved, in other words, the “Tax for Financial Misconducts”. And not surprisingly, it seems the only way that would not make the regulators lose too much face. Others may see this as a simple slap on the wrist. According to last Friday's Wall Street Journal , the SEC has now decided on a major shift from their past enforcement strategy. In the future, the SEC will file “more civil cases in which defendants are accused of negligence only, rather than harder-to-prove charges of intentional wrongdoing or recklessness.” Maybe I am too dense to understand the mystery of this new, oddly -phrased “strategy”, but forgive me, the new gesture is nothing but the effort to reduce the amount of taxation that was meant to be imposed on those financial misconducts. The SEC announced to the world they will now, in military parlance, fire back rubber bullets simply because they don’t believe the bullets will arrive precisely at the enemy’s heart.
But what on earth is a better enforcement mechanism? The enforcement measures adopted by the SEC is an “ex post Tax on existed financial misconducts”, on the other hand, the “Tobin Tax” which was re-proposed by the EU leaders recently, that aims to impose tax on financial transactions is in fact an “ex ante Tax on contingent financial misconducts”. Either out of the fear that the financial institutions will act over-leveraged or imprudently, or out of the failure to send the rouges behind bars, those two solutions are creative but not too effective a mechanism to redirect market actors’ behaviors in the correct direction
A moral solution on enforcement is urgently needed. When the exogenous obedience derived from the market actors, lengthy regulation initiated by the legislators and the punitive form of taxation enacted by the supervisor are all proved to be dysfunctional, it’s time for us to come up with an enforcement strategy that can be internalized via workable principles of market conduct. Let’s face it, were the marketplace a family, family counseling would be an emergency. The level of dysfunction and the resulting disaffection from the public sector, has created not only animus in the general population toward the financial sectors, but frustration amongst those of us who work within the financial sector.
Just like the speed bump theory--we all love to drive fast, alright, maybe not all of us, but driving fast is fun, in particular when we drive on long, straight and boundless roads. However, driving too fast is thoughtless and dangerous to the public. To prevent speedy driving, the government can choose to have more police officers patrolling the roads to enforce direct supervision and punishment, or can choose to set up some speed bombs to direct drivers’ behaviors and awake their cautiousness.
Speed bumps are never a coercive enforcement measure; you will not be finned by passing the speed bump without reducing the speed. Nevertheless, such design, indeed, creates a situation where if one wants to speed and behave recklessly, one will damage and practically destroy ones car the more one does it. Speed bumps internalize a cautious and prudent culture into almost every driver’s mind. And such culture further shapes a driver’s behavior to act in a way that make them reduce their speed to at least several yards ahead of the speed bump, i.e. driver awareness of the consequences. Some moral principles, if disobeyed, may enhance some short term thrill (just like passing the speed bump as fast as one can), while, definitely endangering and potentially destroying the long term individual and public interests. Seeking what moral principles a good governance consist of and how to implement those principles into every market participant’s behavior, thusly the whole system can finally be practiced as an effective enforcement agency, a pressingly urgent agenda for today’s financial regulatory reform.
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