Tuesday, February 24, 2009

Innovation in Financial Regulation

Not surprisingly, the financial crisis and global economic turmoil were the main thrust of the recent World Economic Forum in Davos. The New York Times reports that one of the more original ideas to come out of the conference is the possibility of compensating regulators with bonuses, just like the bankers they oversee.

The underlying logic makes sense. Wall Street uses fat paychecks to attract the best and brightest, so the SEC needs to do the same. And compensating regulators with bonuses would give them an incentive to discover the next Enron or Bernie Madoff in advance, preventing the crisis before it spirals out of control.

It's an intriguing idea, and all the more striking because federal regulatory agencies are not widely regarded as a hotbed of innovation. We'll see whether it goes anywhere.

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