More Comments on Principles-Based Regulation,

Great post. For more on the topic, click thru the links.
Regulation is important to protect the weak and uninformed.

Kling's line is very simple:

1. Ideal regulatory systems can be modeled as games.
2. Regulators *try* to solve problem by creating regulations.
3. The regulated participants *try* to circumvent regulations by following the letter of the law, avoiding the intent.
4. In any system where there is enough money involved, there is no contest...the regulated participants necessarily win.
5. Letter-of-the-law regulation is therefore *guaranteed* to fail in high $ industries like finance.
6. This is a big problem, insofar as we can agree that an unregulated finance industry is undesireable.

Seems all true and obviously so.  

The difficult part is that Kling continues:

7. Therefore we should try a different form of regulation: PBR

More Comments on Principles-Based Regulation, Arnold Kling | EconLog | Library of Economics and Liberty