As published in the Wall Street Journal, September 15, 2012

Complex Rules Often Less Effective Than Simpler Ones

With reference to your editorial “Speech of the Year” (Sept. 12), here’s another Albert Einstein quote: “Things should be made as simple as possible, but no simpler.” Lawmakers and regulators seem to embrace the second part of that admonition, but do exactly the opposite of the first.

There is a tendency to think that a complex environment demands a complex solution. The presentation by the Bank of England’s Andrew Haldane and Vasileios Madouros serves as convincing evidence—as shown time and again in the failures of financial regulation—that complicated regulations aren’t the answer. The Dodd-Frank Act, which is on track to generate 30,000 pages of regulations (compared with Glass-Steagall’s 37 pages), is only a recent example. And it, like most of its recent predecessors, is destined to do more harm than good.

Constructing a complete and coherent regulatory system does not rule out simplicity. But it does require a disciplined commitment by policy makers and drafters to do better work. And it requires more than writing a rule to address every possible perceived wrong. This approach, often seemingly the norm, forces regulators to rely heavily on manuals and checklists rather than common sense.

The concept of “safety and soundness,” for example, has traditionally been evaluated largely through the application of human judgment using sensible criteria. That approach is now largely history as we run to the books for every answer as if, provided enough boxes are checked, an institution must be safe and sound even if a more thoughtful analysis would lead to another conclusion. For regulation to be effective, it must focus first on the bigger picture.

Many of us seem to have resigned ourselves to burdensome, senseless regulation and, as consumers of financial and other services, the unending disclosures we are required to sign, yet few ever read. We assume there is no hope—that it’s just the way it needs to be.

It is said in our democracy that we get what we deserve. Can we expect change? If we deserve better regulation, we will get it. We only need to insist on it.

Douglas Hajek

Sioux Falls, S.D.