Institutional safeguards, whether financial or nuclear power regulation, need to evolve and change hands every two or three decades
The New York Times sometimes offers hidden harmonies. Witness the front-page story on Japan's nuclear industry and its "culture of complicity" and the previous day's Business-section review by of the staff writer Diane Henriques' anatomy of the Madoff affair. Compare:
In Japan, the web of connections between the nuclear industry and government officials is now popularly referred to as the "nuclear power village." The expression connotes the nontransparent, collusive interests that underlie the establishment's push to increase nuclear power despite the discovery of active fault lines under plants, new projections about the size of tsunamis and a long history of cover-ups of safety problems.
Just as in any Japanese village, the like-minded -- nuclear industry officials, bureaucrats, politicians and scientists -- have prospered by rewarding one another with construction projects, lucrative positions, and political, financial and regulatory support. The few openly skeptical of nuclear power's safety become village outcasts, losing out on promotions and backing.
Mr. Madoff depended vitally upon inadequate laws, upon the complacency and incompetence of regulators, and upon the prevailing culture and ethical standards of the financial sector. And the same measures that would have prevented the financial crisis would have stopped Mr. Madoff too. But although Ms. Henriques provides useful factual background, her book contains little discussion of these issues.
During the years of Mr. Madoff's fraud, Congress and successive administrations had eviscerated the S.E.C., whose annual budget equals barely 5 per cent of Mr. Madoff's losses. Regulation of most derivatives was banned, a move that resulted in an opaque market that helped Mr. Madoff lie, enabled banks to profit from Mr. Madoff's funds without needing to invest in them, and set the stage for the financial crisis.
Of course there's a difference between virtually open collusion and benign (for the regulated, at least) neglect. But the similarities show that it's time to take seriously the concept of financial engineering beyond what academia has so far offered. Last year I blogged about "technology's disaster clock" and "bureaucracy's disaster clock." So just as structures and design ideas have 30-year failure cycles, as civil engineers have recognized, so do institutional safeguards, whether financial or nuclear power regulation. The legislation that creates or reforms regulatory structures should have built into it the assumption that no matter what the safeguards, temptation will ultimately find a way around them. (Recall G.K. Chesterton's remark about original sin being the only empirically verifiable tenet of Christianity, or James Madison's "If men were angels....") Part of reforming anything has to be appointing rotating outsiders to review the reviewers at stated 20- to 30-year intervals.
Image: Reuters/Yodo Kyodo; Shannon Stapleton.