Reaction vs regulation

A strong free market advocate I know was extolling its virtues last year even as dark clouds of the economic apocalypse were forming.  Brushing aside the painful lessons of the 1980s Savings and Loan debacle, he was certain that everything would self-correct.

This same free marketeer is now mumbling something about “necessary regulations”.  I thought I had been zapped into Bizarro World when I first heard that blasphemy.

Yet the quality improvement community has long understood the value of regulatory tools.  We call the activities monitoring, statistical process control, auditing and other technical terms but the end result is the same: develop your process, implement it, observe it and then process feedback into it for continual improvement.  This is officially known as “Plan-Do-Check-Act (PDCA)” as well as “Plan-Do-Study-Act” (the latter being a refinement of the original premise).

The first rule of proper regulation is visibility.  Hiding parts of your process serves only a select few (usually at the expense of many) and one should always question their motives for doing so.  The next of course is to monitor the process and, finally, to ensure that lessons learned are factored back in so as to refine it.

But our Federal Government has utterly failed in this regard.  That failure manifests in many ways for sure but I am focusing at the moment on oversight of financial operations.

Thanks to the influence over the years of powerful people decrying “burdensome regulations”, the Fed has been removing its fingers from the various parts of the pie.  And as we have clearly seen not just this time but in plenty of past examples, this encourages brief bursts of unsustainable expansion.  Afraid to be caught short, participants greedily bid the expansion up as far as the bubble can manage.  If this was simply the action of myriad individuals, there would not be as much of a problem– at the slightest sign of danger, amassed individuals will panic and introduce correction into a system.  However, the current fiscal train wreck was brought to us courtesy of institutional corruption, carried by an overleveraged momentum on tracks of unregulated teflon.  Once this beast was rolling, only a massive derailment could stop it.

With too few regulatory mechanisms in place to have slowed it, the Fed is now faced with employing extreme reactionary measures, waving back the welling recession with deficit dollars.  Quality Assurance gurus would be the first to point out the fallacy.  Better to swallow some big pain now, and let the system return to stability (after applying those PDCA regulations) fairly quickly than to react quickly and prolong the pain.  Yet the latter is exactly what has been done and apparently will be done further with unprecedented, counter-capitalistic bailouts.

In the Quality world we know what a mistake it is to automatically assume that any result of a process represents the mean.  We know (thanks to the brilliant work of Walter Shewhart) that sometimes the well-meaning attempts to correct an outcome observed to be off-target will ignore the system’s tolerances and result in overcorrection and “noise”… and possibly a never-ending battle to force the outcomes to the target.  In other words, that’s not really a control but rather a perpetual reaction— and while it may not seem as big and bad as what’s been proposed lately it can serve to mask the true underlying problems.

So let’s encourage our elected and selected officials to get off the pendulum and start looking at banking as a quality process.  Take the shroud off the Wizard’s contraption and let some light in.  The sooner we get back to regulating and away from reacting the sooner we can get on the road to recovery.

UPDATE: speaking of transparency, Campell Brown of CNN writes on President Obama’s promise to improve it.

One response to “Reaction vs regulation

  1. Pingback: Finance Blog » Blog Archive » Reaction vs regulation

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