Who's Guarding Our Commerce?

On many issues of public concern, from food safety to the financial crisis, legislators and commentators line up on one side or the other: Either these failures prove that the free market doesn't work and that more government regulation is required, or that our regulatory structure doesn't work and that more free enterprise is required. Both positions ignore a common thread -- the failure of "guardian structures" to do their jobs properly. The question is why.

It may not be obvious what unites the shipping of salmonella-laced peanut products, the issuance of mortgages without property value adequate to back them up and the sale of dubious securities. Yet oddly enough, all three problems are explained by the same private-sector failure: that of third-party monitors to aggressively safeguard the public interest.

The Peanut Corp. of America, for example, was audited for food safety by AIB International, formerly the American Institute of Baking. Its job was to provide an assurance to food manufacturers that they could buy with confidence. Yet inspectors from the Food and Drug Administration found mold on the ceilings and walls, large holes where vermin could enter, and cockroaches -- both dead and alive.

How could AIB miss such obvious problems? Maybe in the same way appraisers used by mortgage companies missed the wildly excessive valuations they assigned to homes: Both had another agenda.

“Allowing an audit, appraisal or rating to be given by someone who is dependent on the parties involved in the transaction is an inherent conflict of interest. That is why all three widely divergent fields suffered.

The only solution is to strengthen the guardian structures in our commercial systems.

The basic need is to require that no “guardianship” function have any financial interest in the completion of transactions. The decisions the guardians make must in no way increase or decrease their opportunities for business in the future. In effect, these professional tasks need to operate under a series of guilds of qualified food-safety auditors, property appraisers or financial-rating analysts.”

“...or that our regulatory structure doesn’t work and that more free enterprise is required. Both positions ignore a common thread — the failure of “guardian structures” to do their jobs properly.”

‘Regulatory structure doesn’t work’ and ‘falure of the guardian structures’ appear to be along the same meaning.

The reason is that regulation has the assumption of authority with almost no responsibility, and rule making is not cognazent of economic reality.

A perfect example involves the cases with FDA and CPSC two years ago, bad food and toys from China. These two agencies worked well when we had a more self contained kind of economy where supply chains could be monitored from beginning to end, no one was away from the long arm of the law, and spot checks were effective.

But when that balance shifts to an import and services based economy and we are deluged with finished products hitting our shores day in and day out, there’s no way to have a rational expectation that they could all be inspected effectively in terms of cost without creating this behemoth of an agency that would suck more value out of the import chain than could be achieved.

And then we have cases of abuse of authority, like shutting down of meat plants by the recalling of two years of productivity over the treatment of animals when there is evidence of danger to the food supply. There surely could have been other kinds of remedies to what the regulators saw as offensive than putting hundreds of people out of work, but they did it anyway.

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