Finance and economics are difficult. Understanding how and why the financial system or the economy works are deeply impenetrable questions that are best answered by healthy, aggressive debate, not by a consensus that we know what the answers are. In my view financial regulation will only be successful when we have competing schools of thought that are constantly pushing back against each other.
It’s normal for people who work together to settle into a consensus view, in part because it’s stressful to be butting heads on a daily basis, so it’s common for people who feel that their views cannot be expressed without generating conflict or ridicule to go elsewhere. In the best working environments everybody’s view is given weight, so the consensus view is something of a truce — as long as you frame your view in this way, I won’t challenge you. In other working environments, a single group or even individual manages to define the consensus, largely because of that entity’s reaction to other views.
It’s also normal for any industry to develop a consensus view that’s conducive to its interests. While there will certainly be sub-cultures within the industry, the variation is likely to lie within a very narrow range, because the interests within industry will tend to be aligned.
Thus, it seems to me that the principal source of the counterweight that’s necessary to promote healthy debate about the nature of the financial system and the economy is the regulators. We need these regulators to have their own view of how finance and the economy work that should look bat-shit insane when viewed from the perspective of industry. When the regulators take industry to court, it should be common for a war of ideas to be taking place.
Thus, the problem with the revolving door is really one of cultural cross-contamination. If industry and the regulators together settle into a single consensus view of how finance and the economy function, then the result will be destabilizing, because whatever flaws exist in that consensus view will become deeply entrenched in the way finance and the economy function.
We don’t our regulators to agree with industry on what is a prosecutable offense. We don’t want our regulators to agree with industry on the most efficient microstructure of exchanges. We don’t want our regulators to agree with industry on when financial innovation is good.
We do want our regulators to have their own view of the financial system, of the economy, and of what constitutes legal behavior that should be so different from the industry view, that they appear to be generated by people born on different planets. Thus, the real problem with the revolving door is that a collegial consensus on how the financial system and economy function and on what financiers can and cannot legally do is destablizing to the financial system and the economy.
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