One of the problems with assuming that government can regulate everything is that it can’t. Not very well at least. Take Dodd-Frank, which was touted as a way of bringing the banksters under control.

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173) was signed into federal law by President Barack Obama on July 21, 2010 in the Ronald Reagan building. Passed as a response to the late-2000s recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry.

As Jack Henneman points out what it actually threatens to do is create a thicket of rules so dense that only the banksters — and the biggest banksters at that — can navigate through it. He quotes a report:

Rules implementing the Dodd-Frank financial reform law could fill 28 copies of Leo Tolstoy’s War and Peace, according to a new analysis of the Wall Street overhaul.

The law firm Davis Polk, which closely tracks the Dodd-Frank rule-making process, released a graphic Friday that highlights the gargantuan size of the financial reform bill’s overhaul of regulations.

All told, regulators have written 13,789 pages and more than 15 million words to put the law in place, which is equal to 42 words of regulations for every single word of the already hefty law, spanning 848 pages itself.

And if that seems like a lot, keep in mind that by Davis Polk’s estimate, the work implementing the law is just 39 percent complete. (bold emphasis added)

Another estimate puts it more conservatively. There only need to be ten pages of regulation for each page of Dodd-Frank. Here’s the graphic showing that relationship:

But it probably doesn’t stop there. The number of textbooks and commentaries necessary to explain the regulations themselves will probably be longer still. From the POV of information the question that arises is how we can know that the resulting system is computationally correct. As Jack Henneman explains, there is no ready way to tell.

Not only does it require a great many bureaucrats to write, vet, review, revise, and sign off on so much regulation, but a vast army of lobbyists to argue for changes in same to benefit one sort of financial firm over another, and countless legions of lawyers to interpret, litigate, and detect loopholes in no doubt imperfect drafting after the regulations are implemented. Our banks will then spend billions restructuring to comply with the law, if they have not succeeded in limiting its effect by dint of the aforementioned lobbying. If the great and powerful Oz were able to confirm to a certainty that all this would prevent another financial crisis, it might be worth the dead-weight load on the economy, not to mention the further corruption of our republic. Unfortunately, no such assurances obtain.

The problem with regulation as an approach to managing risk it is creates risk in itself. The MIT Sloan School Management Review has an article which explains how more is not always safer.

Legal codes and agreements have also become increasingly complicated, often resulting in loopholes that others can exploit. …

As companies increase the complexity of their systems — products, processes, technologies, organizational structures, contracts and so on — they often fail to pay sufficient attention to the introduction and proliferation of loopholes and flaws. As a result, many firms are continually making fixes, which then adds to the total cost of ownership and often creates new problems. One estimate is that 20%–50% of all fixes to software bugs introduce new, unknown problems….

Build new applications on top of legacy systems, and errors creep in between the lines of code. Merge two companies, and weaknesses sprout between the organizational boundaries. Build Byzantine corporate structures and processes, and obscure pockets are created where bad behavior can hide. Furthermore, the enormous complexity of large systems like communications networks means that even tiny glitches can cascade into catastrophic events. In fact, catastrophic events are almost guaranteed to occur in many complex systems, much like big earthquakes are bound to happen.

Most programmers know this. Thank God for managers who don’t and order perpetual tweaks to the system thereby guaranteeing bugs and the continuous employment of said programmers. And after a while a strange thing happens. The bugs themselves acquire champions. The problems in the system become institutionalized and have to be maintained to protect jobs. The MIT paper continues:

Simplicity is not happening, and it’s not about to occur in any meaningful and sustainable way. Much of the reason for that is self-interest, not just the self-interest of software vendors looking to milk the newest release of a cash cow product but people’s own self-interest. Take, for example, the U.S. tax code. Although everyone agrees that it’s far too complex, the system represents so many interconnected vested interests that any significant simplification would create a public outcry, initiated by those affected negatively. Consequently, people can’t agree how best to simplify the tax code and the only direction is toward more complexity, not less, and that progression will continue unless war or revolution resets the entire system.

The net result is that Dodd Frank will simply expand to swallow up all the available space and computing power that can be assigned to it. And the more you fix it, the bigger the demands will be. It’s almost like an episode from Star Trek. And what it suggests is that for a certain class of problems, not only is a detailed regulatory approach impractical, it may actually be impossible.

And Dodd Frank is not alone. Wait until we get to Obamacare. If Dodd Frank is 28 times the length of “War and Peace”, the regs for Obamacare are two and a half times the length of the Bible — and growing.

How problems actually get solved through history is an interesting subject in itself. They are often damped down by something completely unexpected. For example the tons of horse manure which threatened to bury cities at the end of the 19th century disappeared with the invention of the automobile. It’s entirely possible that the current problems of the banking industry will be fixed by the disappearance or transformation of the current financial system itself, and not by armies of regulators. The endemic lack of telephones in the Third World was fixed by cellular communications.

The world works in strange ways. Mark Steyn observed that bureaucrats have a deep seated desire to make reality unconstitutional. But reality has a knack of winning out in the end, and of surprising us too.


Did you know that you can purchase some of these books and pamphlets by Richard Fernandez and share them with you friends? They will receive a link in their email and it will automatically give them access to a Kindle reader on their smartphone, computer or even as a web-readable document.

The War of the Words for $3.99, Understanding the crisis of the early 21st century in terms of information corruption in the financial, security and political spheres
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The Three Conjectures at Amazon Kindle for $1.99, reflections on terrorism and the nuclear age
Storming the Castle at Amazon Kindle for $3.99, why government should get small
No Way In at Amazon Kindle $8.95, print $9.99
Storm Over the South China Sea $0.99, how China is restarting history in the Pacific
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