There is a distinct air of fantasy surrounding the governments enthusiasm for regulation as a solution to real problems occurring in diverse industries. The most heavily regulated segments of our economybanking, auto manufacturing, oil and gas production, mining and health careare all making the news regularly with major tragedies in their respective areas.
The media reaction and fallout from these tragedies is peculiar indeed. Usually the company was at fault. But equally certain is that the regulatory apparatus that was in place was designed to prevent just such an event. This regulatory regime comes at a not-insignificant cost. Although not bearing the primary responsibility for the mishap, surely we should begin to question the effectiveness of the individual regulators. Why is it that this rarely, if ever, occurs?
There are probably several reasons. In the real world, what young man or woman aspires to a specific career as a government regulator? By definition, they would be people averse to taking direct operational responsibility. To the extent that this is true, the whole current design of the regulatory system is seriously diluted. From the individual point of view, it may be that government employment is seen as more secure than employment in the private sectorcertainly that is frequently the unstated assumption.
When there is an accident outside these heavily regulated areas, it is always described in hushed tones as an activity that is totally unregulated. The implication is clearhad it been regulated, the accident would not have occurred. It is increasingly apparent that such a conclusion is not warranted.
Clearly this is an area that requires some fresh thinking.
There have been some feeble attempts at self-regulation, but there have not been notable successes. The Financial Industry Regulatory Authority is a private organization that disciplines the stockbroker industry. The Securities and Exchange Commission deputized Standard & Poors and Moodys to oversee the securities rating systemsand that arrangement was a clear failure.
The one area that has been an outstanding success has been the oversight of community banks. Following the 2008 financial crash, 465 of these small banks failed by the end of 2012. The fallout from those failures was well controlled; the failing bank would be taken over on a Friday and re-open on Monday as a branch of a stronger bank, and business would continue as usual. This success in an otherwise bleak landscape of bureaucratic regulation deserves further study.
The regulation of too big to fail financial institutions has not been successful, and they remain a peril to the taxpayer.
The spectacle of U.S. Attorney General Eric Holder fining Toyota Motor Corp. more than $1 billion in the uncontrolled acceleration case while auto industry regulators are simply overlooked is a classic illustration of the one-sided view of regulation. Toyota was ultimately vindicated, but yielded to pure extortion. Congress is finally showing some interest in the case regarding General Motors Co.s Chevrolet Cobalt, and it seems to be on the cusp of asking appropriate questions of the National Highway Traffic Safety Administrations regulators.
It is not enough to be pro-regulation or anti-regulation. What is needed is a critical review of the design of the particular regulatory schemeand a hard-eyed view of what would be required to make it effective. The first answer from the bureaucrats will always be more resources. That position certainly has to be treated with skepticism by any worldly observer. More probably, the organizational design and the leadership qualifications of the people involved are more relevant. Political appointees who worked hard in the last campaign are rarely the ideal choice to lead a regulatory organization.
Thomas C. Graham is a founding member of T.C. Graham Associates. He is a former chairman and chief executive officer of AK Steel Corp., president and chief executive officer of Armco Steel Co. LP, chairman and chief executive officer of Washington Steel Co., president of the U.S. Steel Group of USX Corp. and president and chief executive officer of Jones & Laughlin Steel Co. His column appears monthly. He invites readers comments and can be contacted at firstname.lastname@example.org.