Kyle writes,

Kling’s line is very simple:

1. Ideal regulatory systems can be modeled as games.
2. Regulators *try* to solve problem by creating regulations.
3. The regulated participants *try* to circumvent regulations by following the letter of the law, avoiding the intent.
4. In any system where there is enough money involved, there is no contest…the regulated participants necessarily win.
5. Letter-of-the-law regulation is therefore *guaranteed* to fail in high $ industries like finance.
6. This is a big problem, insofar as we can agree that an unregulated finance industry is undesireable.

Seems all true and obviously so. The difficult part is that Kling continues:
Therefore we should try a different form of regulation: PBR

… In roughly all cases, the identification and analysis of the problem is the high-value part of the discussion. The solution almost always sucks. This is because solutions are hard, and if you haven’t tried it, you’re almost always wrong.

Great post.