Is more regulation the answer?

We may well be in the tail end of the subprime crisis but with the news that Freddie Mac and Fannie Mae have also been substantially affected, there have been calls for increased regulation of the financial markets. Perhaps the answer is not so much more regulation, but better regulation although the balance is always hard to find. I was reminded of this aspect of trying to achieve a good balance when reading "The Commanding Heights".

From page 369:
[In addressing environmental concerns and health] ..
He [Judge Stephen Breyer] points to the challenge of building flexibility into regulation. "It is always a problem to get discretion into the process so that the regulator can apply a reasonable amount of cautios regulation. Because no one trusts anyone else, there is less discretion, more rules, more rigid results. The only way to improve this regulation is to give the administrators more discretion. But Congress writes the rules to prevent discretion. If there is too much discretion, there is a risk of abusing it. If you stop discretion, you get rules and rigidity."

Critics of the current system worry about its rationality and the "last 5-or 10-percent problem." Remediating 90 or 95 percent of a pollution problem can be done in an efficient, cost-effective fashion. The last 5 or 10 percent - purity - is a much more difficult - and sometimes an almost unachievable - goal, and one that diverts resources from more pressing needs. "The drive for perfectionism has created a very big mess," said Justice Breyer. In his book Breaking the Vicious Circle: Toward Effective Risk Regulation, he cited a case he presided over when he was a federal judge. The case involved a ten-year battle to force the cleanup of a toxic waste dump in New Hampshire: "The site was mostly cleaned up. All but one of the private parties had settled. The remaining private party litigated the cost of cleaning up the last little bit, a cost of about $9.3 million to remove a small amount of highly diluted PCBs and "volatile organic componds" (benzene and gasoline components) by incinerating the dirt. How much extra safety did this $9.3 million buy? The forty-thousand-page record of this ten-year effort indicated (and all parties seemed to agree) that, without the extra expenditure, the waste dump was clean enough for children playing on the site to eat small amounts of dirt for 70 days each year without significant harm. Burning the soil would have made it clean enough for children to eat small amounts daily for 245 days per year without significant harm. But there were no dirt-eating children playing in the area, for it was a swamp. Nor were dirt-eating children likely to appear there, for future building activity seemed unlikely. The parties also agreed that at least half of the volatile organic chemicals would likely evaporate by the year 2000. To spend $9.3 million to protect non-existent dirt-eating children is what I mean by the problem of the 'last 10 percent.'"