The Financial Regulatory Chess Game
By Arnold Kling
Regulation is best understood as a dynamic game of action and response, in which either regulators or regulatees may make a move at any time. In this game, regulatees tend to make more moves than regulators do. Moreover, regulatee moves tend to be faster and less predictable, and to have less-transparent consequences than those that regulators make.
Kwak, his co-blogger Simon Johnson, and I are all deeply frustrated that regulators think that next time they will be able to get it right in regulating big banks. Our view is that big banks are inherently more difficult to regulate, if nothing else for political economy reasons. When the political system can neither regulate you nor allow you to fail, things are really messed up.