A Comment on Metzger and Zaring: The Quicksilver Problem

Abstract

I INTRODUCTION It is a pleasure to comment on the fine institutional studies in this issue by Gillian Metzger and David Zaring. (1) Professor Metzger explores the many ways in which financial regulation, as reflected in the regulatory functions of the Federal Reserve (the Fed), differs from mainstream administrative law, as represented by the Environmental Protection Agency (EPA). She describes the historical roots of the divergence, explains how it has persisted over time, and offers some intriguing thoughts about the possibilities for convergence in the future. Professor Zaring paints a fascinating portrait of the Federal Open Market Committee (FOMC), the entity within the Fed that determines national monetary policy. Drawing upon transcripts of FOMC meetings during the Alan Greenspan era, he concludes that internal custom provides a more important constraint on the Committee's behavior than formal administrative law does. A common theme of both the Metzger and Zaring studies is that financial regulators differ from ordinary administrative agencies on the familiar dimensions of accountability and transparency. Both the Fed and the FOMC are highly independent, effectively immune from presidential oversight, and largely free to ignore Congress because they are funded out of their own operations. They operate under vague statutory mandates that confer enormous discretion. There is no public participation in the Fed's oversight of banks or the FOMC's setting of monetary policy. As Professor Zaring notes, judicial review is almost completely absent. (2) Moreover, most of the critical functions performed by the Fed and the FOMC are shrouded in secrecy. Meetings of the Fed and the FOMC are closed to the public, the results of bank examinations are confidential, the monetary policy directives of the FOMC are not disclosed until they are no longer in effect, and the transcripts of these meetings remain under wraps for five years. What is missing from both studies is the identification of a key attribute of financial regulation that helps explain these departures from traditional administrative law. Financial regulation concerns activity that has very low exit costs. What is being regulated is money, money substitutes (like money market funds and short-term repurchase agreements), and other financial assets, such as bonds, stocks, and derivatives. Financial regulation is concerned with the ultimate in slippery stuff; financial instruments are like quicksilver that can wiggle out of your grasp at a moment's notice. (3) This attribute exerts a pervasive influence on the nature of financial regulation, rendering it difficult in many circumstances to adopt ordinary norms of administrative law. There seems to be no prospect of this changing in the foreseeable future, and therefore it is unlikely that a complete convergence between financial regulation and other forms of administrative law will occur. II EXIT COSTS AND THE NATURE OF REGULATION Ordinary administrative law developed in the context of activities that either had no exit option or very high exit costs. Railroads are the pioneering example, as they were the subject of the first major federal regulatory statute--the Interstate Commerce Act. (4) Railroads have large fixed costs and are literally nailed to the ground. The only way to exit from the industry is to go bankrupt. Other public utilities, like electric and gas distribution companies, share similar features. Professor Metzger takes EPA rulemaking as the paradigm of modern administrative law, which reflects the thinking of most administrative law scholars. (5) EPA regulations, no less than rate regulations by the Interstate Commerce Commission and public-service commission orders, target facilities that have high fixed costs and little ability to relocate in the short run, such as coal-burning power plants and automobile assembly and distribution facilities. …