Many thanks to Brett McDonnell for pressing me on a few open questions my prior posts left him with. His comments have helped me to clarify in my own mind the problems I see with the Volcker Rule and the legislative process that gave rise to it.
In particular, I do not believe that a critique of responsibility-shifting delegations of the sort I have argued the Volcker Rule may represent depends on some notion of the optimal rule, though I can see why Brett might draw that inference from my prior posts (which suggests I need to work on the language some more as I write this paper). Instead, the inference to be drawn, I would argue, is about the optimal governmental body for making such decisions -- Congress versus regulatory agencies – and the trade-offs that we make among transparency, accountability, and efficient lawmaking. And this is especially worth emphasizing, given that we don’t know yet the final rule or how effective enforcement will be.
I do not contend that legislators are immune from interest group pressure or are more likely to enact substantively better laws. Brett is correct about the pressure for the legislature to “do something” – whether it makes any sense or not – in the wake of a financial crisis. Nor do I mean to suggest that the problem of interest group influence on the lawmaking process would conveniently vanish were Congress to legislate precisely rather than to delegate. In fact, as argued by some commentators, interest groups might wield even more influence when policy is made directly by Congress, rather than through delegations (because it would place more power in the hands of legislative committees and their leaders). Moreover, Congress should delegate substantive lawmaking to agencies under many circumstances, such as when it makes sense to harness agency expertise, when an agency can make policy more efficiently, or when uncertainty about the future renders ex post gap filling prudent.
But the legislature does offer an advantage in terms of policymaking: transparency and electoral accountability. Direct policymaking by Congress, for all its faults, renders legislators' actions more observable by voters, who then have an opportunity to hold them accountable for their choices. So the question of appropriate delegation is, to my mind, really a matter of degree, motivation, and trade-offs under the particular circumstances.
One particular irony here is that, though Brett disavows any SILR (Slightly Imaginary Larry Ribstein) leanings, I actually am a bit of an SILR, particularly when it comes to financial regulation. Like Brett, I am not a particular fan of the Volcker Rule. Though I remain concerned about bank risk-taking (indeed, financial institution risk-taking more broadly), I have doubts that the Volcker rule, even a better-designed one, is the right approach to address that concern. In short, I chose to study it, not because of any particular belief in the rule’s wisdom, but because I suspected – based on the congressional maneuvering that accompanied its passage and the importance of proprietary and fund activities to banks’ bottom line – that it would illustrate a point about whose voice gets heard on financial reform issues as the sausage is really getting made, so to speak.
But I’m not as confident that the benefits of vague laws given little effect by agency interpretations outweigh the costs. Aside from the false signal to voters (and, potentially, other governmental actors) about the state of financial regulation, these moves have other, potentially unintended, consequences. Let’s remember that even a Volcker rule that fails to substantially alter proprietary trading and fund investment activity will impose costs – banks have reorganized their activities to comply with the mechanics of the law and there will be ongoing compliance and oversight expenses.
There is really much more to say on this, but I’ve exhausted myself with this anniversary celebration and have probably exhausted you patient readers as well. So, I’m signing off now. Thanks for reading.
And, as I mentioned, my goal with these posts was to float some preliminary data and ideas for a work-in-progress. So, feel free to send comments my way.
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