Rice Box Regulation

September 30, 2008

At a party on Saturday night, I got the news from someone who identified himself as “an economist.” He studies economic sociology at GMU, and is preparing to give a talk at Yale. If there could be any remaining doubt about his credentials (and how could there be?), he assured me, “I’m very well respected.” And so this well-respected Yale man gave me the scoop on how we could have avoided this whole financial crisis. A paraphrasing:

He: The problem was overleveraging. If you’re holding ten mortgages, and you can only afford for one of them to default, that’s overleveraged.

Me: So should there have been a regulation to disallow leverage?

He: No, some leverage is okay. If you are only holding two mortgages, that’s okay. But overleveraging is not okay. If you have ten mortages, that’s overleveraging.

Try as I might, that was the best definition of “overleveraging” I could get out of him. As such, it makes an excellent example of a phenomenon that I will dub “rice box regulation.” I once bought a particularly memorable box of rice which warned me, quite earnestly, “For Best Results, Do Not Overcook.” Thank you, box of rice. Cooking the rice is necessary, of course, because you wouldn’t be able to eat it otherwise. But if you want to get the best results possible, you should cook it just the right amount, and not more than that.

And apparently, at least according to one sociological economist, the same principle should guide us in how we manage regulation of the financial industry. Some leveraging is good, so we should allow it, but too much is bad. How much leveraging should we have, then? Easy: the right amount.

This is another one of those points that is obvious but not trivial. Often, people assume that “government regulation” can solve problems without bothering to posit a mechanism by which the government can actually determine which activities to allow and disallow and in what quantities. As I wrote a while ago on the problem of externalities and government, it’s not enough to show that some market failure exists. You must also have a plausible account of how well-intentioned regulators could know enough, ex ante, to improve the situation. (Extra credit: Make it much harder for yourself by relaxing the assumption that regulators are well-intentioned. Next, allow asymmetrical information and lobbyists. Good luck.)

Addendum: The reliably snarky Megan McArdle posted on this back in June.


2 Responses to “Rice Box Regulation”

  1. David Says:

    I’m not sure I’m going to disagree with you here, but I really love language and its applications, so I’m going to defend the rice box.

    When I started playing golf, I learned most of what (little) I know from my dad. Of all the rules I can recite by rote about the game, the one I heard the most, and can recall most clearly now, is this: “Never leave a birdie putt short.” The ideal result is that you putt the ball into the hole; since this won’t always happen, the adage my dad gave me espouses the thinking that even if you miss, you have at least given yourself a chance to succeed.

    Similarly, in the summers of my middle- and high school years, I played a lot of tennis. One instructor I most often took lessons from was a gargantuan Dutch man named Job DeBoer. I wasn’t a great student of tennis, because I only remember two things of him: one was the absurd size of his adam’s apple, and the other was his instruction that I should never miss two consecutive serves in the same way. If I hit the net with a serve, for example, any subsequent serve is acceptable so long as it clears the net.

    The point I’m trying to make here is that the rice box wants to impart to you a strategy for making the rice: I didn’t see the box, but from the information you’ve given me it doesn’t say anything about undercooking. So I guess if I’m going to disagree with you anywhere it’s in the idea that regulation isn’t as outright silly as you make it out to be; if/when it’s implemented, obviously the goal is perfection, but everyone acknowledges that’s not realistic so the solution is a strategy that oversees the basis of overcompensation. For example, if you’re going to err, err on the side of undercooking.

    But that’s mainly a linguistic argument, rather than an economic or political one.

  2. Agreed. There are few things so annoying as people who willfully misunderstand language because it doesn’t follow some idea that they have of what constitutes “good grammar.”

    My point was political, and so I allowed my usual linguistic rigor to slacken. I’m happy to be called out on it, but I just like the way “rice box regulation” sounds.

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