2015 Articles

A Comment on Metzger and Zaring: The Quicksilver Problem

Merrill, Thomas W.

The low exit costs that characterize financial markets are significantly responsible for the strange version of administrative law that applies to financial regulation. I do not intend to assert any deterministic thesis. History and path dependency clearly matter. It is unquestionably true, for example, that historical decisions such as that to include regional presidents of the Fed banks on the FOMC have had a lasting effect on the emergence of what appears to be a bizarre regulatory body. Nevertheless, the distinction between industries characterized by high versus low exit costs has considerable explanatory power, and can help explain not only why financial regulation includes so many exceptions to ordinary precepts of administrative law, but also why financial regulation suffers from a general deficit of accountability and transparency. The concept of exit costs may have broader explanatory implications as well. It can help explain the demise of railroad-rate regulation and the significant deregulation in other transportation industries, because the development of competitive alternatives dramatically lowered the exit costs to consumers in these industries. It can also help explain the demise of labor unions in manufacturing, given the reduced costs of exit from domestic manufacturing production associated with globalized trade. Attention to exit costs also reveals that process-intensive administrative law may be possible, even in industries whose technologies otherwise are characterized by low exit costs, provided that the government has other ways to control entrance in and exit from a market. In the end, however, I would not bet against the ingenuity of the finance industry in figuring out how to work around these kinds of efforts to corral financial assets.