Throw Out the Rulebook

Megan makes a characteristically smart comment:

Bill Mayer and Clive just had a very interesting exchange on the topic of the American versus the British approach to financial regulation. American regulation is extremely rules focused–everything not compulsory is forbidden. Britain is nominally looser, with the caveat that you can’t get away by saying that “the rules didn’t say I couldn’t!” You are expected to run a sound institution, and if the regulator decides you haven’t . . . start practicing saying “I retired to spend more time with my family. In the waiting room at the courthouse.”

Bill Mayer is in favor of this approach, though Clive points out that Britain has had its own problems. ([cough]Northern Rock[cough]). I am broadly in agreement with the notion that American regulation is far too reliant on detailed rules. These are sought by the companies to provide them safe harbor from litigation, but the result is often severe dysfunction. My old accounting professor, Roman Weil, made a similar argument about American accounting standards to Congress in the wake of the Enron debacle, which lays out why these attempts to solve problems with exponentially multiplying rules is ultimately foolish.

Yeah. The evil genius of having a gigantic rulebook is you can outsource your business ethics to experts — experts in things that aren’t ethics, no less! By converting the zillions of small ethical decisions that a huge corporation full of crazy people will have to make every day into questions about rules with answers in a vast compendium that normal people can’t read, we can monetize decisionmaking. Should I do x? Hire the rules experts to research the issue and reach a determination! Everybody wins: sure, keeping a laundry list of hired geeks on permanent retainer is costly, but uncertainty about risk exposure is one of the costliest of modern anxieties.