I've enjoyed reading your weblog. I have a question though. You complain about "more government rules and regulation" with respect to the power grid, but then you note that "This is a complete and total failure on the part of the regulators at every level" with respect to the mutual fund scandals. I was wondering, why is the addition of regulations for the power grid a bad thing (when we saw the problem with an unregulated system earlier this year), while it appears from your statements that the regulations of the mutual fund system are a good thing that should be enforced? Just wondering what you felt the differences were.

Excellent question, Jack and I'm glad you asked.

Brokerage firms are not directly regulated by the government. Yes, the SEC has enforcement responsbility for violations of the various and sundry securities acts, but the actual regulation in the brokerage industry is done by the National Association of Securities Dealers (NASD), an industry group, which actually acts as the industry watchdog.

With most brokerage firm issues the SEC doesn't get involved. The NASD handles them and generally has done a decent job of self-policing.

The problem with the mutual fund scandal is that the NASD had multiple avenues from which to catch the problem before it made it to the point of an official governmental inquiry.

Now the NASD isn't the only organization guilty of failure here. Each and every brokerage firm also has a compliance department, which is supposed to keep the brokers and traders in check and legal.

The compliance departments failed and so did the NASD. That is why I called it a failure at every level of the regulatory chain. It is, it just happens that this time the regulation isn't supposed to be enforced by the government. A self regulating organization or SRO like the NASD is similar to a governmental regulator, but with a little more flexibility to apply common sense (something that isn't done as frequently as it should be).

The main difference between the two issues is that in the case of the mutual funds the laws (they actually aren't regulations, but are law passed by Congress) are already on the books and have been since the 1930s. The organizations to regulate the industry are already in place, they simply need to be more vigilant in their duties.

With the power grid, they're talking about creating new regulation which will lead to the creation of new bureaucracy which will hamper our ability to apply common sense to future issues with the grid. I don't know what the ultimate solution to the power grid problems will be, but I firmly believe that the solution does not involve more regulation.