Regulating in the Dark and a Postscript Assessment of the Iron Law of Financial Regulation

Abstract

How should one regulate in the midst of a financial crisis? This is a fundamental question for financial regulation, and it is not readily answerable, as the issues implicated are truly complex, if not intractable. Yet, foundational financial legislation tends to be enacted in a crisis setting, and over the past decade, when confronted with this question, the U.S. Congress has answered it reflexively by enacting legislation massively increasing the scope and scale of the regulation of business firms, and, especially, financial institutions and instruments, in a manner seemingly oblivious to the cost and consequences of its actions, A simple, but telling, comparison of a commonly used measure of legislative complexity, a statute's published length, conveys what Congress has wrought. The Sarbanes-Oxley Act of 2002 ("Sarbanes- Oxley" or "Sarbanes-Oxley Act") is 66 pages long and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank" or "Dodd-Frank Act") is an astounding 848 pages, whereas the twentieth century foundational federal banking legislation, the Federal Reserve Act of 1913 and the Banking Act of 1933 ("Glass-Steagall Act"), are 31 and 37 pages, respectively.