Megan McArdle has written a reply to James Surowiecki, who has made a very broad argument regarding the Consumer Financial Protection Bureau. Surowiecki’s basic point is that regulatory initiatives tend to help the regulated industry. I like Megan’s take:

You cannot defend the Consumer Financial Protection Bureau by arguing that some regulation at some point in history worked (any more than you can indict a regulation on such thin grounds). If the examples are similar enough they may be admitted into evidence by the defense or the prosecution, but ultimately, the regulation has to win the case on its own merits.

And the deeper problem is that Surowiecki is right: regulatory initiatives really do tend to “help” the regulated industry. But it’s not clear that our goal should be to entrench the power of incumbent firms, as Megan explains:

There’s also the fact that adding any regulatory layer inherently advantages incumbents over newcomers; it’s hard to enter a new market that requires an immensely expensive compliance department just to open the doors. That has its advantages–firms are stodgier, more easily regulated, and less likely to get into trouble the way they did in 2008. It also has a lot of drawbacks. Such banking services are expensive for both depositors and borrowers. They’re also not necessarily as worried about efficient capital allocation, since excessive profits tend to attract the beady eyes of the regulators, so there’s a risk that profits will be distributed as things that managers and shareholders can consume, like junkets and loans for friends and family members, rather than compensation or dividends.

When Surowiecki writes the following:

History suggests that business doesn’t always know what’s good for it. And, at a time when Americans profoundly distrust the financial industry, a Warren-led C.F.P.B. could turn out to be the friend that the banks never knew they needed.

I think he misses something important, which is that a heavily regulated industry attracts a different kind of person than a lightly regulated industry. It is hardly surprising that, over time, the people who work for and own regulated firms come to embrace regulation, and indeed to influence and shape regulation.

Surowiecki also praises the creation of the S.E.C.:

Wall Street said that the creation of the S.E.C. would demolish stock trading, but the commission helped make the U.S. the world’s most liquid and trusted stock market.

I tend to agree with economist Amar Bhidé on this subject.