The new financial reform legislation is massive: about 2300 pages, 14 titles, 1400 sections. Yet,much of it is not in final form but is yet to be determined. It calls for 47 studies, 74 reports, 7 new government bodies or departments*. We won’t know all the rules and the ultimate impact for years. If the devil is in the details, he (or she) will be revealed only gradually over time.
The blanks yet to be filled in will be a source of uncertainty for some time to come, which is usually considered a negative aspect of the legislation. I don’t disagree. However, there is a positive side to a fill-in-the-blank approach, which may outweigh the negatives. Let me explain, but, first, a little background.
Philip Howard wrote a wonderful book in 1995 titled, The Death of Common Sense. The book chronicled examples of absurd outcomes that resulted when well-meaning people couldn’t overcome the restrictions imposed by laws written in too much detail, leaving no room for flexibility in implementation. As I recall, for example, Mother Teresa couldn’t get approval to build a needed shelter because of a building code that mandated elevators in buildings over a certain height, even though the authorities wanted to cooperate with her. A city that had been paying thousand of dollars to have brush removed off a park was unable to accept an offer to be paid thousands of dollars for the same service. Needed porta-potties could not be put into service in strategic locations because of legal requirements for equal treatment that made the cost prohibitive. Similar legal provisions kept lifts for wheel-chairs from being provided on some buses without triggering a requirement that they be provided on all busses. You get the point, even though my memory of these examples may be a little off.
Philip Howard’s point was that such problems were caused by laws written deliberately in great detail to take human discretion and judgment out of their enforcement. Lawmakers, over time, have increasingly tried to cover all the bases in their legislation to make sure their intentions are carried out to the letter. They don’t trust future implementers to be faithful to the intent of the law; so they tie their hands, with unintended consequences like those cited above. Broader, less detailed, laws that leave some room for common-sense implementation would avoid such absurdities.
Parts of the financial reform legislation, no doubt, are too specific and too detailed to permit common-sense implementation. However, the fill-in-the-blank parts presumably give some leeway for the regulators and supervisors to apply some common sense. This is particularly important in this case since Congress wrote this legislation with punitive motives against “the bankers,” against “Wall Street,” and so on. It was written by people trying to placate and take political advantage of a populist surge that may be based on good motives, but may not be the best basis for fair and effective regulation. In trying to avoid the pitfalls of undesirable unintended consequences, we can only hope.
*Summary stats were taken from an excellent summary of the legislation in Financial Services Insights, a publication of Protiviti, a risk consulting firm.
Disclosure: I’m on Protiviti’s Advisory Board.