This article reveals a fundamental mismatch between the nature of finance and the nature of financial regulation. Modern finance is dynamic and complex. Market actors and regulators often have only a fraction of the information pertinent to the decisions they are making. The process of regulating finance, however, makes rule changes difficult and contingent on processes that implicitly assume a high degree of predictability and stability with respect to the impact of a proposed legal change. The challenges that result are myriad. The processes meant to confer legitimacy and improve efficacy fail to achieve either aim, resulting instead in excess ex ante investment and too little discussion when it matters. Regulation often aggravates rather than offsets the degree of dynamism, complexity and unknowns in the financial system. The article argues that incremental changes are needed but not sufficient to tackle these challenges. It proposes complement current approaches to financial regulation with commissions, constituted once a decade, that could take a more holistic approach to assessing the state of finance and financial regulation. These commissions could help address both the legitimacy and efficacy concerns that arise from the mismatch between finance and how it is regulated.
Visiting Associate Professor of Finance, Kellogg School of Management
William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance
Harvard Law School