Arnold Kling  

The Cognitive Capture Dilemma

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Steven M. Davidoff writes,

What makes these issues so intractable is that you want regulators to interact with the people they regulate. In addition, regulators from industry sometimes best understand the industry they regulate.

He correctly points out that the top bank regulators get most of their information about banking from the top bankers. However, it is wrong to imply that everyone other than top bankers has no useful information. If you burrow down a few layers (get below the suits and talk to geeks), you can get even better information. In fact, my guess is there are geeks within the bureaucracy that know stuff that folks like Geithner, Summers, and Bernanke do not know. But the in-house geeks are hard to locate, because they are not the ones who play the organizational politics game well enough to get close to the top positions at Treasury and the Fed.

But ultimately regulators will be under-informed relative to what they would need to know to meet the expectations of those who see regulation as the solution for problems in markets. That is why one of my catch-phrases is "Markets fail. Use markets."

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CATEGORIES: Political Economy

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mulp writes:

Don't police and prosecutors regulate drug sales, theft, murder, et al by dealing with criminals?

How is it different when consumer protection agencies regulate lending with prohibitions of predatory lending, which are loans that are not based on the borrowing being able to afford and repay the loans with the income and assets they have?

The argument for Federal override of this consumer protection law for mortgage lending in 2004, and then the Federal agencies doing nothing to regulate mortgage lending on the principle that regulation does not work, and that lenders would never make mortgage loans that could not be repaid. Did the lack of regulation prevent lending that was predatory and lending that could not be repaid because the borrowers had no income or assets sufficient for the debt?

How is State prosecution of predatory lending practice any different than the criminal and civil actions of the prosecutors in theft, fraud, drug sales, murder?

Police and prosecutors have often been corrupted by the criminals they deal with and look the other way or even assist in crimes such as drug sales and murder; should we consider criminal and civil laws to be futile because the agencies that implement the law are captured by the criminals?

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