Dubnick, Melvin J., “Toward a ‘Responsible’ Future: Reframing and Reforming the Governance of Financial Markets.” In Iain McNeil and Justin P. O’Brien (eds.), THE FUTURE OF FINANCIAL REGULATION (Oxford: Hart Publishing, forthcoming) (2010), pp 394-421.
Abstract:
The current efforts to design relevant reforms of the troubled financial markets both in the US and abroad are preoccupied with repairing a fundamentally flawed set of policies . There will no doubt be some initial sense of accomplishment as regulatory jurisdictions are reorganised and regulatory agencies are created and or shuffled about in a reform scheme that seems radical on the surface, but is in fact superficial. After a brief consideration of the dynamics of the “blame game” that is generating and shaping most of the reform agenda in Washington, London and elsewhere, I make the case for an approach that goes beyond mere tinkering with traditional regulatory mechanisms and instead focuses on the need to reform the “governance” of the financial sector. This perspective requires that we shift and raise our sights from the arena of institutions and regulatory mechanisms to the domain of governance regimes. Further, I make the case the existence to two interrelated regimes that require attention if we are to make any headway in the design of relevant and effective reforms. One of those regimes — the regulatory, which focuses on governance through control — has already received considerable attention from analysts, and I highlight one effort (by Hood, Rothstein and Baldwin, hereafter designated as HRB) at framing the elements of that regime. The other regime — accountability, which fosters governance through responsibility — requires more analytic attention, and I offer the foundations for a framework that seeks to emulate the HRB effort. I conclude by offering some basic “design principles” that need to be kept in mind as we deal with the future of financial market governance.
AI-Generated Summary:
This document discusses the challenges and frameworks involved in reforming the governance of financial markets, emphasizing the need for a shift from regulatory mechanisms to governance regimes.
Critique of US Financial Regulatory Reforms
- The 2009 proposals aimed for a major overhaul to prevent future crises but may be superficial.
- The reforms focus on reorganizing institutions rather than addressing underlying governance issues.
Focus on Financial Sector Governance
- Emphasizes shifting from traditional regulation to reforming governance regimes.
- Identifies two regimes: regulatory control and accountability through responsibility.
Challenges of Problem Framing and Blame Games
- Policymakers struggle to define the core problems, leading to blame games that influence policy.
- The crisis is often viewed through competing causal theories, affecting reform directions.
Accountability and Policy Design Issues
- Calls for greater accountability lack clarity on specific mechanisms and objectives.
- Without clear problem framing, reforms risk incoherence and superficial fixes.
Policy-Making as a Complex, Chaotic Process
- Uses the ‘garbage can’ model to explain ad hoc policy responses driven by problem, policy, and political streams.
- Major episodes like AIG bonuses exemplify reactive, short-term policy responses.
Concept of Governance and Regimes
- Governance is broadly defined as the pursuit of good order and workable arrangements.
- Regimes are enduring social and economic arrangements shaping governance, including regulatory and strategic approaches.
Regulatory Regimes and Their Design
- Regulatory regimes involve institutions, norms, and relationships aimed at control.
- Hood, Rothstein, and Baldwin’s framework offers insights into designing effective regulatory regimes.
Framework for Risk Control in Policy Domains
- The study develops a broad analytic framework focusing on means and mechanisms used to control individual and collective risk behavior across various policy areas, including global markets.
- Central to this framework are three core control components: information gathering, standard setting, and behavior modification, which are influenced by context and content factors.
The Human Regulation and Behavior (HRB) Model
- The HRB model describes how control components operate within specific contexts, considering risk type, public attitudes, and regulatory effort style.
- It provides a heuristic and empirical tool for describing and testing governance and regulatory regimes across policy domains.
Normative and Accountability Regimes
- Governance involves both risk control and expectation management, requiring regimes that foster responsibility and moral standards.
- An accountability regime includes institutions, norms, and relationships that establish standards of responsible behavior and build trust within a normative order.
Dual Perspectives on Accountability
- Accountability is discussed as both a technical control mechanism and a normative moral setting.
- The mechanism view focuses on account-giving tools like oversight and audits, while the normative view emphasizes moral responsibility, fiduciary duties, and standards of responsible conduct.
Causes and Solutions in Financial Crisis
- The crisis is often attributed to failures in accountability mechanisms, such as transparency and oversight, but also to the collapse of normative standards.
- Policymakers tend to focus on control mechanisms for quick fixes, while the normative infrastructure is less addressed but crucial for long-term responsibility.
Types of Accountability Control Components
- Four core component types include performative (behavioral mandates), managerial (discretion with standards), regulative (oversight and monitoring), and constitutive (setting the environment and norms).
- Reforms based on performative accountability aim to specify actions, while managerial reforms allow discretion within standards.
Variations in Accountability Regimes
- Variability depends on content (specificity, scope, stability), context (cultural values, social fields), and conditions (political, economic pressures).
- Expectations can range from explicit legal standards to amorphous norms, influenced by cultural orientations and social dispositions.
Design Options for Accountability Reforms
- Reforms should address both control and responsibility, emphasizing the complementarity of governance regimes.
- Policy options vary based on the degree of activity specificity and agent autonomy, with reforms aiming to rebuild normative standards or enhance control mechanisms.
Principles for Effective Policy Design
- Reforms must target governance issues within and across policy domains, ensuring control and responsibility are balanced.
- Design principles include clarity, strategic goal-setting, incentivization, broad performance measures, and adaptability to unforeseen events.
Strategic and Normative Aspects of Reform
- Policy design should incorporate strategic hypotheses and normative values, recognizing that control mechanisms serve instrumental purposes while responsibility fosters intrinsic trust.
- Long-term reforms require a balanced approach that considers both technical controls and moral standards.
Challenges in Policy Reform under Crisis
- Current efforts rely on quick fixes and blame games rather than comprehensive design, risking systemic dysfunction.
- A deeper, long-term policy approach involves rethinking governance structures, emphasizing normative standards alongside regulatory controls.
Conclusion and Future Directions
- The study advocates for a balanced governance framework that integrates control and responsibility.
- Developing a detailed analytic and design scheme for accountability regimes is essential for effective financial market reforms.