It's tempting to think that the regulatory turf battle breaking out into the open during hearings on Capitol Hill today are another sign of the disarray that lets market participants play one regulator off of another, leading to a race to the bottom.

But while such regulatory arbitrage has led to problems in the past, there are benefits to competition among regulators. In other words, it can also be a race to the top, as state regulators like former New York Governor Elliott Spitzer and current NY attorney general Andrew Cuomo have shown.

Say what you want about their tactics (not to mention Spitzer's morals), but those guys forced the SEC under Chris Cox to be much more aggressive than it would otherwise have been on any number of issues since the collapse of Enron. And say also what you want about the Sarbanes-Oxley Act and other forms of regulatory overkill, the upshot was more regulation rather than less.

That is, it wasn't the SEC or the Fed that pushed for the most far-reaching change on Wall Street post Enron, but Spitzer and Cuomo, and there's a whole bunch of other state securities regulators who by my lights are much more aggressive than the Feds are.

And that's what I think explains at least some of the calls we keep hearing in Washington for consolidation of the regulatory agencies. But it's a head fake worthy of Kobe Bryant. 

Just as Phil Gramm and his like gutted federal derivatives oversight after exemptions had been granted to the industry from state gaming laws, eliminating any regulation whatsoever of the instruments most responsible for the credit crisis, the financial industry wants the Fed put in charge because it's easier to control than other regulators. (Banks dominate the board of directors of the 12 Federal Reserve Banks that comprise the system, and that includes the NY Fed, which is where the Fed's regulatory "expertise" lies.)

Cut the other guys out, especially that tough nut named Sheila Bair, and you've won the day. That may not be regulatory arbitrage, but it sure sounds like a formula for regulatory capture to me.