Tuesday, November 04, 2008

Who regulates the regulators?

On his blog, To the moon, Mark Cole writes (about a year ago to the week) an interesting piece on the safety of the Airbus A380 – something we entertained also a long while ago.

What particularly stands out is that the Federal Aviation Authority was still issuing "special conditions" to its approval, raising serious safety issues, at the same time that it was actually issuing the formal safety certification. This led the Air Accident Current Newsletter to observe:

The prevalence of special conditions is an indicator of the degree to which formal certification standards have not kept pace with the march of technology.
What brings this bang up to date is the news that regulators who oversaw the banking system before the recent financial crisis will be paid bonuses this year "even though their boss admitted the watchdog had failed to foresee the risks ahead."

Yet, as we have seen with the banking crisis, there was – at the very least – a mismatch between the regulatory capabilities and the performance of the industry. As a result, the crisis stemmed, in part (and we would maintain, a very large part), from regulatory failure.

Therein lies an interesting and troublesome conundrum. Regulation is the monopoly of our masters who, by this means (and others) control the activities of the productive economy – and much else besides.

In the event of failure, fingers are quickly pointed at the visible players, and our masters invariably seize the opportunities to propose and then impose more regulation. But what if – as we constantly aver – the regulation, or its enforcement, is faulty? Who assesses that, and who then takes the necessary corrective action?

That is the really worrying bit. Our masters, being largely responsible for the regulation, are hardly going to admit their own faults. And, being our masters, who is going to demand that they do – especially when, in this country, we have a venal media and frivolous legislature?

This is sort of a variation of quis custodiet ipsos custodes? The modern version could be, "who regulates the regulators?" The question is timeless, but we seem even further from being able to answer it than we ever were.