You Can’t Eliminate Risk Through Regulation

In a recent article by the Associated Press, writer Adam Geller quoted U.S. Travel Association Vice President Geoff Freeman in the following description of the challenges facing the TSA:

But the agency was working under what Freeman calls “an unachievable mandate.” Congress demanded an agency that eliminated risk. But the risks are always changing, as terrorists devise new methods and government parries. That has led to an agency that is always in crisis mode, constantly adding new policies designed to respond to the last terror plot.

In reading this article, and this quote in particular, I was reminded of the similar mandate of risk elimination found in the Dodd–Frank Wall Street Reform and Consumer Protection Act. As with the creation of the TSA following 9/11, we seem to have a similar reaction to the current economic crises.

Some financial systems regulation is warranted, particularly around consistent communication of the terms and conditions of financial products and services, but to believe that you can facilitate the elimination of risk (systemic or otherwise) through regulation in a fashion that does not overburden the very people the regulation hopes to protect is misguided thinking.

I have real concern that in ten, if not five, years we may well be looking at heavy-handed regulations impeding the creativity of our own financial industry much in the way TSA’s full body scanners and up-close and personal pat-downs are impeding the free travel of our own citizens.

I explored this concept more in our The Systemic Risk Challenge blog post of a few weeks ago, but suffice to say it was worth revisiting because of the real-time case study of risk elimination currently underway in our nation’s airports.

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