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Comment by neonbat | Hacker News Reader

There's no real incentive for regulators to regulate if you think about it. If you DO regulate you're less likely to have exit jobs to Wall Street. If you DON'T regulate and things go well, everything will be good and you'll go through the revolving door to work for big banks and big bucks. If you DON'T regulate and everything goes very badly (you know like a financial meltdown) it's "not your fault."

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That doesn't make any sense. The more you regulate, the more banks need in-house regulatory folks and the more opportunities you have to go through the revolving door.

Deregulation is not a good thing for people who want to go in-house doing regulatory work.

That's wrong. That kind of regulation comes from the legislature. It's an outside force. The effects of a regulator's actions on their ability to join banks afterwards are measured independently of legislature regulation. What I'm talking about is the people whose job it is to enforce that regulation (the people we call "regulators"). Their incentive is to not enforce it as strongly as they could or should. They "adapt" their policy enforcement to fit what people believe in industry right now, which is why they let all these banks peddle bad loans and commit massive fraud. The reason they "adapt" is contained in my original post.

Congress only lays out the general contours of the regulatory scheme. It's the regulators that impose the specific requirements and define what they mean.

That is the case with Dodd-Frank. That is not usually the case with regulation. Normally it goes "here are the rules, execute." Dodd-Frank is a nightmare exactly because they just have an outline full of blanks. It turns out regulators are not that good at 1. Enforcing regulation or 2. Writing regulation. The reason for this is because they have no incentive to.

A friendly, helpful regulator will get job offers to work for the firms he is regulating.

A tough regulator will not.

And yet Wall Street is highly regulated (it might not be very effective, but there is a huge amount of regulation nonetheless), so it seems like there must be forces at work beyond what you're considering here.

See my response talking about legislature regulation versus regulators whose job it is to enforce that regulation (It is the comment above).

It is kind of like the prisoners dilemma. If a regulator defects(doesn't do his job) he gets a high paying bank job. If he doesn't defect (does his job right) then he is stuck as a government employee with shrinking budgets.

Any industry that gets regulated, has a strong motivation to take control of the regulation of their own industry. This process is called regulatory capture.

Once regulatory capture has happened, incumbents in the industry are incentivized to use regulations to create barriers to entry.

The result is a lot of regulation, lots of work around regulatory compliance, and very little that accomplishes the purported purpose of said regulation.

Every so often regulatory failures become so bad that government steps in, creates more rules, and we get more bureaucracy. But the status quo inexorably reasserts itself.

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