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The Denver Post published an AP story about Obama’s appointment of Elizabeth Warren, “an aggressive consumer advocate and Wall Street adversary,” as de facto head of the new Bureau of Consumer Financial Protection (http://www.denverpost.com/business/ci_16106784). This appointment is significant for two reasons: 1) It marks a continuation of the process of concentration of power in the White House to avoid increasingly difficult and lengthy senate confirmation processes associated with appointing regulatory agency directors, and 2) it is an expression of the Democratic Party’s wise commitment to preserve and continue to develop the sophisticated regulatory architecture necessary to manage the modern market economy.

David Brooks commented on the first aspect on The News Hour last night (http://www.pbs.org/newshour/bb/business/july-dec10/shieldsbrooks_09-17.html). According to Brooks, this is a trend that has been growing over the course of the last five administrations. For good and for ill, there has been a gradual concentration of political power in the executive over the course of American history. The rise of the administrative state since the New Deal had led to some limited dispersion of that power (since Congress created each administrative agencies and confirmed the director appointed by the President), but, if Brooks’ assessment is correct, even that small moderating influence on presidential power has been eroded by the executive reaction to contentious confirmation hearings (not only by removing Congressional oversight, but also by shifting the power from semi-autonomous agency secretaries to, in this case, a “special assistant to the president”).

However, while many pundits and politicos are most concerned about the distribution of power, I am most concerned with the efficacy of its use. As long as enough separationof powers exists to prevent any slide into dictatorship (and it does, despite the perennial overheated rhetoric on the Right), the distribution remains an issue of the means to our ends, and the salient question becomes whether the power thus exercised accomplishes goals which serve the public interest. Since neither our individual liberties are in any actual danger as a result of the concentration of power in the White House, nor, for the most part, is the functionality of distributed competences, the question really is whether increased regulatory oversight of financial markets serves the public interest.

And the answer is: Yes. The combination of the complexity of the modern market economy and the consequences of “information asymmetries” creates an indispensable need for an increasingly sophisticated regulatory architecture. The reason for this is that in information-intensive market sectors, where some minority of market actors are close to information that is remote and inaccessible to the majority of market actors, that minority of market actors will tend to manipulate markets to their advantage and to the public’s disadvantage, often with disastrous results. Examples of this abound, including the recent financial sector collapse, the Enron-fabricated California energy crisis of 2000-2001, and even Bernie Maddoff-like ponzi schemes (which exist in abundance). The challenge, indeed, is creating and running regulatory agencies capable of keeping up with those who are closest to the action.

This is not to say that there are not defects and downsides associated with the administrative state. Certainly, it is possible for market regulations to fail a cost-benefit analysis, and impose burdens on business more onerous than the benefits warrant, costing jobs and stifling wealth production. Agency rule-making processes, however, are highly attuned to this consideration, and make necessary  assessments that offend less pragmatic sensibilities, such as placing price tags on the value of human life (since regulations that consider individual human lives infinitely valuable would inevitably lead to the complete shut-down of the economy).

The bigger problem is the phenomenon known as “agency capture,” in which regulatory agencies become “captured” by the industries they are supposed to regulate, and make rules that serve the industry’s rather than the public’s interests. This happens both as a result of political ideology and allegiances (mostly conservative presidents sympathetic and beholden to particular industry interests appointing agencies heads who represent and advocate for those interests), and organic processes (finding individuals competent to regulate information-intensive  industries generally requires recruiting from the pool of people who have worked within those industries, and thus have friendships and loyalties tied to those industries).

But the challenge of effectively regulating our complex modern market economy does not counsel a retreat from the attempt to do so; rather, it counsels renewed vigor and assertiveness in the attempt to do so. The creation of this absolutely essential, and long overdue, new regulatory agency is a step in the right direction.

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