President Biden’s initial actions after inauguration included an order ending the decades-old practice of measuring rules in terms of dollar costs. Seemingly small beer for a president facing a pandemic, insurrection, and so much else, this is a paradigm-shaking change to the construct of U.S. regulation with far-reaching impact on U.S. financial policy. It thus drew rapid-fire conservative criticism about what they feared would be the subjective and political nature of new-age rules. However, rulemaking across the ages has always been subjective and political. Take a look at EPA over the past four years if you’ve any doubt. Regulators mostly do what politicians want since many are themselves politicians one way or the other, political pressure has more than a little to do with even the driest Federal Register entry, and, of course, politicians also make the laws that set rulemaking in motion for purposes often far afield from eternal truth. The only thing new about the Biden order is that regulators now know that the new class of politicians wants them to advance economic, health, environmental, and social justice. That’s not all bad.
In fact, subjectivity has a lot to be said for it. In his masterful book, The Economists’ Hour, Binyamin Appelbaum tells a most disturbing tale of regulatory “objectivity”: the quantification in dollar costs of the value of each human life. Study after study and agency after agency came up with one or another measurement, for example deciding which kinds of deaths were nastier than others and thus worth more. There were a lot of numbers in these calculations and the numbers ended up in a lot of rules, but none of the numbers was right because human life is of course of immeasurable value. I prefer Scripture to doctoral dissertations.
Financial regulation does not rise to Gospel truth, making the subjectivity that characterizes it still more unavoidable. Indeed, the more regulators think only about regulatory burden for the regulated and neglect the structural, stability, and equality costs of new rules, the larger the unintended, destructive consequences – and not just for vulnerable communities. Putative objectivity has cost financial stability dearly.
As I feared in 2012, post-crisis rules have made banks safer – the value the Fed measured – only at great cost to a financial system increasingly dominated by nonbanks. One after another “consumer-protection” rule measures compliance costs for lenders without accounting for those resulting from unaffordable debt. We built huge GSEs premised on the seemingly-quantifiable benefit of home ownership, but left out hundreds of billions of taxpayer risk, millions of foreclosed homes, and a decade of lost opportunity. And, even when costs are counted, they’re often the wrong costs. Many rules – see the FDIC’s recent relaxation of ILC parent-company standards just for a recent one – measure costs only in terms of paperwork burden. So many forms filled out by so many employees paid so much an hour and one has the cost of a rule even if, as in this case, risk to both financial stability and vulnerable consumers go unmeasured.
Virtually all the financial rules I’ve seen in recent years are actually remarkably subjective in how they measure cost, benefit, or both. The Fed cloaks much in the undeniable benefit of financial stability. But, asked a direct question by Senate Finance members on how to define it, Janet Yellen recited provisions in Dodd-Frank, not a clear construct of what it means and how it might best be measured. The OCC’s mammoth CRA rule spoke much of community benefit, but often attributed these to dollars spent by banks, not differences made in household well-being or inter-generational mobility. Many of the latest rules from the OCC and FDIC are subsumed under the “innovation” halo, but what this is and even why innovation for innovation’s sake is to be valued is never made clear, let alone measured against other costs and benefits.
All of the regulatory “benefits” cited in so many rules are in fact little different than the “racial justice,” “equity,” and “human dignity” objectives stipulated in President Biden’s order. Each is an expression of a regulator’s view of how best to maximize a wide array of subjective goals personal beliefs. A transparent, qualitative, balanced, and forward-looking assessment of financial standards will lead to less paperwork-cost counting and far greater attention to shared prosperity and lasting financial stability.