Industry veterans don’t always make bad regulators

July 3, 2013

There are people who, for reasons beyond my understanding, take the time to learn a great deal about golf even though no one is paying them money to do so. The same is true for baseball, and cooking, and video games, and stamps, and all sorts of other hobbies.

CFTC chairman Gary Gensler worked for Goldman Sachs, but that doesn't mean he's their friend. (Bloomberg)
CFTC chairman Gary Gensler worked for Goldman Sachs, but that doesn't mean he's their friend. (Bloomberg)

But just about no one devotes a big chunk of their life to learning the finer points of telecom policy or securities law if they're not getting paid for it.

This creates a problem for regulatory agencies: In order to effectively regulate an industry, you need to understand it. But the people who understand it tend to be paid by it. And it's hard to trust somebody who's being paid by the industry to regulate the industry. The conventional wisdom is that any time the White House nominates a regulator with deep industry ties, that means the industry in question can relax.

There's good reason to think that way. For one thing, it stands to reason that someone who once worked in the industry might one day want to go back to it. That necessitates keeping potential employers relatively happy. For another, a longtime industry veteran is going to have deep friendships in the industry, and it's human nature to be more trusting of friends than strangers.

Back in May, Kevin Roose had a smart post questioning the conventional wisdom on this point. He gives the example of Gary Gensler, an ex-Goldman Sachs executive who runs the Commodity Futures Trading Commissions. Gensler has much deeper industry ties than most of his colleagues on the CFTC board. But he's also been much tougher on Wall Street. Roose speculates that this might be because he actually knows Wall Street and is wise to their tricks, while some of his fellow commissioners are more easily swayed by the highly technical arguments of slick industry lobbyists:

The watering-down of Wall Street regulation is not a magical, hands-off process. It happens because individual regulators and politicians are swayed by the arguments of financial sector lobbyists, campaign donors, companies in their home districts, and other competing allegiances.

A related argument is that industry outsiders can become captured by the need to seem like they're not out to get the industry they regulate. So where someone like Gensler can't be effectively criticized, at least in public, as an inveterate hater of Wall Street, a longtime critic of Wall Street can. That might make the critic overly solicitous, if only to secure and retain the job.

Roose's point is that the typical shorthand in which industry experience = industry stooge might not be particularly helpful. What matters is where the regulator actually comes down on the issues. A good regulator with industry experience might, in some ways, be even better than a good regulator without industry experience. Anyone who works in an office knows that often the most devastating critiques often come from frustrated workers on the inside.

The problem with this argument is that it makes it almost impossible to effectively assess regulatory candidates on the front-end. The confirmation process is such a nightmare under the best of circumstances that no serious regulator would dare derail their nomination by actually explaining what they intend to do in open hearings before the Senate. If experience isn't a useful shorthand for assessing regulators, then there's not much to go on save the basic leanings of the White House that nominated them.

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Brad Plumer · July 3, 2013