The Cognitive Capture Dilemma
By Arnold Kling
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.”