FCC Chairman Proposes 'Net Neutrality' Rules

FAWN JOHNSON AMY SCHATZ

Federal Communications Commission Chairman Julius Genachowski Monday outlined his plan for requiring Internet-service providers to keep their networks open to legal content and external devices.

The plan, which is a top priority of Internet advocates who aggressively supported President Barack Obama in his run for the White House, would put into law the FCC's principles to treat all Web traffic equally, a concept known as "net neutrality."

It also is a blow to big phone companies including Verizon Communications Inc., AT&T Inc. and Comcast Corp., which have argued against further regulation of the their networks.

If the plan is approved, it also would impose broad new regulations on wireless companies like Sprint Nextel Corp. and T-Mobile USA, a unit of Deutsche Telekom AG. Wireless firms, to date, haven't been subjected to the same kind of open-Internet scrutiny that companies providing cable, fiber, or DSL-type connections have faced.

Getty Images

FCC Chairman Julius Genachowski speaks at the Brookings Institution on Monday.

More

• Speech Draws Strong Reactions | Remarks
• U.S. as Traffic Cop in Web Fight
• Democrats Push for 'Net Neutrality'
• Digits: What Is Net Neutrality?
• Topics: Net Neutrality

"The rule-making process will enable the commission to analyze fully the implications of the principles for mobile network architectures and practices --and how, as a practical matter, they can be fairly and appropriately implemented," Mr. Genachowski said. (Read the FCC chief's full remarks here.)

"The exact expectations you have of your PC, you're going to have of your mobile phone," said Josh Silverman, CEO of Skype Technologies, which has fought to make its Internet-based phone technology available on cellphones.

Mr. Genachowski stressed that his proposal is intended to provide "fair rules of the road for companies that control access to the Internet."

"This is not about government regulation of the Internet," he said. "We will do as much as we need to do, and no more, to ensure that the Internet remains an unfettered platform for competition, creativity, and entrepreneurial activity."

Mr. Genachowski wants the five-member independent FCC to vote on the proposal at its October meeting, the date of which hasn't been scheduled. It would add to the FCC's four existing Internet principles a rule saying companies can't pick and choose among the legal content they serve up, as well as a rule saying providers must disclose how they manage their networks.

The rules would have to be approved by a majority of the board; the three Democrats on the panel support net neutrality.

"I will propose that the FCC evaluate alleged violations of the nondiscrimination principle as they arise, on a case-by-case basis, recognizing that the Internet is an extraordinarily complex and dynamic system," Mr. Genachowski said.

Mr. Genachowski announced his plans at the same time a federal appeals court is reviewing the FCC's citation last year of Comcast for throttling certain high-bandwidth video connections. Comcast and others have argued that the FCC didn't have legal standing to issue the punishment.

The appeals court's decision is expected sometime next year.

Mr. Genachowski hinted at actions that he believes would violate the open-Internet principles, such as wireless companies that have blocked Internet-based phone services on their networks. He also noted that some providers have tried to block access to political content.

The FCC is investigating why Google Inc.'s voice service was rejected by Apple Inc. for the popular iPhone. Apple claims it is still reviewing Google's new phone-management service. Google contends that Apple executives unequivocally declined to include Google Voice in the iPhone application store because the service duplicated an iPhone function.

Google has long been a champion of open-Internet principles. Google's self-described "Chief Internet evangelist," Vint Cerf, said Monday that Google "could not be more pleased to see Chairman Genachowski take up this mantle."

Verizon Vice President of Federal Regulatory Affairs David Young said his company supports the basic tenets of an open Internet and trusts that the FCC will tinker with the rules only when violations are clearly demonstrated.

"I'm pleased to hear that the chairman intends to do only as much as needed and no more," Mr. Young said. "We need to see what are the problems that need to be fixed and what are the examples that require a dramatic change."

The FCC on Monday also launched a new Web site, www.openinternet.gov, designed for the public to follow the discussion and weigh in.

If the FCC does force U.S. wireless carriers to open their networks to data-heavy applications like streaming video, it could push them beyond the limited capacity they have. Already, in areas like New York and San Francisco, a high concentration of iPhones has caused many AT&T customers to complain about degrading service.

In such a scenario, wireless carriers may have to rethink how much they charge for data plans or even cap how much bandwidth individuals get, said Julie Ask, a wireless analyst at Jupiter Research.

The FCC's proposal will take into account the bandwidth limitations faced by wireless carriers, according to people familiar with the plan, and would ask how such rules should apply to current networks.

The rules could encourage big Internet companies to launch new data-intensive services by establishing that their traffic can't be slowed or blocked. In the business market, companies that make Internet-phone services or video-conferencing software may invest more heavily in those services, some analysts say.

The rules are likely to be a big boon to smaller tech companies, like Silicon Valley start-ups and small makers of mobile software for Apple's iPhone and other devices, that wouldn't be able to afford paying Internet providers for special access.

"Any company or piece of software that becomes popular, generating a lot of traffic, would tend to benefit," said Jonathan Zittrain, the co-founder of the Berkman Center for Internet & Society at Harvard University.

Most Internet providers have resisted "net neutrality" rules in the past, saying they have a right to control traffic on networks they own and that it isn't a good idea for the government to micromanage Internet traffic.

Phone companies including AT&T have argued that they can live with the FCC's existing principles, but they have argued there is no reason to put more formal rules put into place.

Republicans are likely to oppose the FCC's new proposal -- both at the FCC and in Congress -- arguing that the FCC is trying to fix problems that don't exist and that the agency should take a more hands-off approach to the fast-changing industry.

"With only a few isolated instances of complaints alleging net neutrality-like abuses ever having been filed, it is a mistake," said Randolph May, president of Free State Foundation, a free-market-oriented think tank.

The concept of network neutrality originated with the nation's longtime telephone monopoly. AT&T and its successors were prohibited from giving any phone call preference in how quickly it was connected. Because the Internet was born on phone wires, the concept survived into the Internet age largely by default.

That notion was challenged toward the end of the 1990s, as cable companies began offering Internet service. Cable companies argued that because they were content companies and not phone companies, the principle of network neutrality didn't apply to them.

Phone companies responded by getting into the content business as well, with television service. As a result, both the cable companies and phone companies had incentives to create conditions on the Internet -- either through pricing or slowing or speeding up certain sites -- to favor their own content.

In 2005, the FCC deregulated the Internet business, by ruling that Internet providers were communications companies and not phone companies and, importantly, were therefore no longer subject to the old phone rules such as network neutrality.

The FCC instead created its four "guiding principles" for protecting network neutrality. They were vague enough to embolden those looking for ways around it. Major phone companies like AT&T subsequently said they were considering creating "fast lanes" on the Internet, available at a higher price -- plans they put on hold amid an outcry.

Now, by codifying the principle, the FCC is seeking to limit erosion of network neutrality.

Mr. Genachowski is expected to set plans to open a formal rule-making process on the issue at the FCC's October meeting.

—Jessica E. Vascellaro, Christopher Rhoads, Niraj Sheth and the Associated Press contributed to this article.

Supreme Court Rules on Voting Rights Act Case

How Will New Financial Rules Affect Consumers?

Financials Fall After Promise of Tougher Rules

How Zoning Rules Would Work in a Free Society

Mises Daily by Ben O'Neill

It is well known that the libertarian political philosophy is antagonistic to coercively imposed rules that limit people's freedom to use their private property as they see fit. Indeed, the very essence of libertarianism is the nonaggression principle that condemns the initiation of force against person or property. As a result, libertarians have been critical of zoning laws, which restrict the ability of property owners to develop their property or use it for their desired purposes.[1]

Because of this antipathy to zoning laws, some critics of libertarianism fear that a libertarian society would leave people incapable of exercising any control over their neighborhood and preserving the character of their surroundings. They worry that the decisions of surrounding property owners could change the character of their neighborhood to the detriment of their property values or preferred lifestyle. For example, some may worry that their local park will be developed into a housing complex leaving them with nowhere to take their children to play. Others worry that their neighbors may build huge structures that overshadow their now sunny backyards. Whatever their specific concerns, many people share the view that zoning laws are required to prevent their neighborhood from being despoiled by outrageous building developments or uses.

Fears of inappropriate building development or drastic changes to the character of a neighborhood are often grossly exaggerated. Some are inclined to fear that without the protection of coercive zoning laws a skyscraper might be built in a small suburban neighborhood or a brothel might open up next to a children's preschool. However, even in the absence of any restrictions, the possibility of such outcomes is extremely remote and fears that the repeal of zoning laws would open the floodgates to outrageous developments such as these are overstated.[2]

Building developments and commercial usage of buildings are almost always strongly driven by the desire for profit and therefore they will almost always cater to the tastes of prospective property purchasers and customers. There is not likely to be much demand for residential or commercial space in a skyscraper towering over a sleepy suburban area, simply because such a tall development would unnecessarily and wastefully economize on cheap and ample ground space, leading to excessive expense. Similarly, no brothel worth its salt would choose to open next door to a children's preschool (or at least operate during school hours) since this would almost certainly drive away potential customers. In general, developments such as these are avoided simply by the desire of property owners and businesses to do business in an area that is suitable to their particular industry.

Private property and voluntary zoning

Contrary to the alleged necessity of zoning laws, there is ample scope for noncoercive solutions to zoning issues in the context of a free society of private-property ownership and nonaggression. In particular, private ownership of property allows for restrictive covenants to be agreed between the property owner and another party so that the allowable uses of land are limited according to the wishes of the parties. It follows that property owners within a given neighborhood may contractually agree to impose restrictions on themselves with respect to the allowable developments on their land or the allowable uses of their property.

In some cases, restrictive covenants may mimic the kinds of restrictions present in zoning laws and may therefore be used as a means of voluntary zoning. Property owners may agree to limit developments on their land to a certain height as in existing zoning laws; they may agree to paint their properties in a similar color scheme, as with some housing complexes; or they may agree to restrict the use of their property to particular uses, such as residential use.

It is no mystery why private-property owners might voluntarily undertake to restrict their own property rights. They might do so for monetary payment or other valuable consideration. For example, some property owners might enter into restrictive covenants in order to secure similar restrictions on their neighbors. In such cases, a property owner would weigh off the benefit of having an enforceable restrictive covenant over his neighbor's property against the detriment these restrictions would cause his own property ownership. A property owner would also have regard not only to his own desired usage of his property, but also to the likely desires of prospective purchasers and the resultant effect on the market value of his property.

Instead of relying on quid pro quo restrictions, a system of voluntary zoning would also allow people to purchase restrictive covenants from a willing party. For example, a man with a strong aversion to dogs in his neighborhood could seek to purchase a restrictive covenant preventing dogs from living on his neighbors' properties even if he does not desire any particular restrictive covenant being imposed on his own property (obviously he will not allow dogs there himself, but he does not need a restrictive covenant to do this). In such a case, the neighbor would consider whether or not the money offered is more valuable to him than his existing right to have dogs living on his property. Regardless of the particular preferences of the parties involved, voluntary agreement to a restrictive covenant would demonstrate ex ante gains to all parties to the covenant.[3]

Voluntary zoning through private restrictive covenants already exists in areas where government has not imposed zoning laws. Such covenants have shown themselves to be perfectly adequate to protect property owners against adverse development by others.[4] Voluntary agreements for restrictions on the use of property also exist in apartment and townhouse developments where property owners govern common areas under a corporate arrangement. These arrangements exist even in areas in which there are existing government zoning laws, though they are often crowded out by these laws. Some complexes have restrictions on use (such as rules against pets), some complexes have restrictions on development or alterations, and some have rules requiring a certain uniform color scheme or aesthetic design for all properties.

While some may prefer not to live in complexes such as this, where they are restricted by their neighbors in the use of their property, there can be no moral objection to this from a libertarian perspective so long as these arrangements are undertaken with the consent of property owners. Of course, in many cases, property owners will buy into a scheme with existing restrictions, but in this case the property title purchased is already restricted, and the restrictions therefore become a condition of their purchase.[5]

Some may object that zoning rules involve substantial positive externalities and that voluntary zoning would result in a "free-rider problem" since those property owners who refuse to agree to restrictions may nonetheless benefit from the effects of restrictions agreed upon by other property owners. However, even if a property owner can safely rely on others to enforce restrictive covenants to his own benefit — and this is by no means certain — and even if such positive externalities lead to problems of economic efficiency, it is sheer economic nonsense to suggest that coercion is the proper means to solve these efficiency problems.[6]

A property owner should not be compelled to join a restrictive covenant simply because he derives a benefit from a covenant between others. Nor should any other person be forced to contribute to the value of this unsolicited good. Any "free-rider problem" in this situation is merely an assertion of an inefficient underutilization of restrictive covenants, for which there are several available entrepreneurial solutions such as pledge contracts,[7] buyouts of property, and other voluntary arrangements. If property owners do not avail themselves of these voluntary options, then this is prima facie evidence that any such restrictions are not in their best interests so that no efficiency gains are possible.[8]

Problems with government zoning

Like most other government legislation, zoning laws are a violation of property rights. They involve forcibly imposing a restriction on legitimate private-property use through legislative fiat. A person, who has acquired property through homesteading or through voluntary trade with another person who legitimately owned the property, should rightly be able to use his property in any way that does not intrude upon the property rights of others.

Some may argue that property rights are themselves restricted in scope to the conditions inherent in the initial land title, so that zoning rules may be built into the initial grant of land by government. Under this view, freehold title may be considered as granting reasonably wide property rights, whereas leasehold title grants narrower property rights, which are restricted by zoning or other rules. The problem with this position is that it implicitly assumes that government is the legitimate owner of all (otherwise) unowned land, so that property rights in this land are acquired by government grant and substantiated by government certificates of title.

However, this position is incorrect. The right to property is not determined by government decree; it is determined by the objective principles of homesteading and voluntary trade. While government certificates of title may approximate genuine property rights and provide evidence of acquisition, they cannot grant property rights since the government holds no genuine rights over unowned land to begin with. In fact, most government certificates of title illegitimately specify restrictions on land use that are untenable according to the rules of homesteading.

Aside from the coercive nature of government-imposed zoning laws — which is itself sufficient reason for objection — these restrictions are also far less likely to accord well with the preferences of local residents than systems of voluntary zoning undertaken between the residents themselves. Indeed, the fact that these restrictions are imposed without the consent of property owners demonstrates that they are not in accordance with the desired arrangements of at least some of those property owners. Moreover, lacking an unhampered private market in property titles and restrictive covenants, the government has no means of rational economic calculation of people's preferences when imposing zoning rules. Regardless of their intentions, government officials simply cannot weigh the pros and cons (to local residents) of proposed restrictions, since they have no rational objective means of economic calculation. For these reasons, it should come as no surprise that zoning laws are one of the most controversial areas of local governance, with many dissatisfied parties.

Controversy over zoning laws is aggravated by the fact that coercive zoning laws must inevitably involve arbitrary bureaucratic discretion. Changes in communities — such as growth in population, changing demography, or growing or diminishing affluence — can give rise to new demands for certain kinds of property and property uses, and the restrictions on property development and use must therefore be adapted to suit changing demands. In the case of voluntary zoning, restrictions like this will occur by renegotiating existing arrangements and providing consideration to induce covenant holders to allow changing restrictions. This ensures that rational economic calculation occurs. However, in the case of government-imposed zoning laws, this will instead involve political advocacy and political decision making — in particular, zoning laws will inevitably involve substantial discretionary power being arrogated to government bureaucrats and being exercised without recourse to any rational means of economic calculation.

In addition to the calculation problem involved in coercive zoning laws, these laws also make the enforcement of restrictions more remote for the actual people involved with the property in question. Whereas a system of voluntary zoning gives direct enforceability to individual property owners and covenant holders, a system of government-imposed zoning laws gives control to their political masters, bureaucrats and politicians.[9] This relocation of the locus of decision making entirely changes the character of the decision and the incentives involved.[10] Property owners and covenant holders have intimate direct knowledge of local conditions and are motivated by their desire to improve their amenities and property value. On the other hand, bureaucrats and politicians in charge of zoning issues usually lack this intimate local knowledge and are instead motivated primarily by job security, predicated on political popularity. As with other forms of coercive top-down planning, the accumulation of decision-making power in these political bodies renders the zoning process less responsive to the genuine needs of affected residents — and more responsive to political lobbying.

Because zoning problems involve continually changing local conditions, bureaucrats and politicians are inevitably vested with substantial discretionary power in the creation and enforcement of restrictions. As with other forms of political power vested in the government, this discretionary power is inevitably exercised in favor of those groups who support the power of the decision makers. In a representative democracy, a local property owner, affected by zoning decisions, is merely another face in the crowd whose power over zoning decisions is limited to his political influence with the local council. As a result, most people have little ability to exercise control over the zoning decisions in the neighborhood in which their property is located. Instead, such a process is liable to be overly influenced by politically influential groups, such as wealthy property developers or highly organized groups of perennial busybodies.[11] In some cases, local residents may successfully band together to influence the decisions of their political masters, but this is by no means guaranteed, and their property rights are highly insecure as a result.

In fact, like other discretionary bureaucratic rules that allow interference with property rights, zoning rules allow bureaucrats and politicians to hold developers and other property owners to ransom. Even in the course of arguing in favor of zoning laws, law professor Bradley Karkkainen nonchalantly tells us that, while zoning laws may appear to completely prohibit certain developments, the reality is a little different:

In fact, zoning functions more like a "property rule" [a rule protecting an entitlement by injunctive relief], allowing neighborhood residents (or their governmental representatives) to enjoin a proposed development that does not conform to current zoning, while leaving room for the would-be developer to "buy" the entitlement to build through design concessions, campaign contributions, and the like.[12]

Here we see the real nature and purpose of zoning laws. Since such laws invest discretionary control over property development and use in our "governmental representatives," these laws allow political parties and other political interest groups to extort funding from wealthy developers — funding that is usually forthcoming.[13]

In addition to being inherently corrupt, this practice of extorting money from property developers often leads to a quid pro quo in which governments use coercion to assist wealthy developers in acquiring land and trampling on the legitimate property rights of others (through eminent domain laws or other coercive means). One commonly hears the complaint that local governments are in the pockets of developers, but it is rarely appreciated that this is an inevitable consequence of the government's attempts to extort support from developers through coercive zoning laws. This is just one manifestation of the inevitable regulatory and political capture that occurs when governments attempt to control private business.

This neat little symbiotic arrangement, which is of great benefit to major political parties, may help to explain the large disparity between a highly critical academic literature[14] and the zoning policies of government. Over a decade ago, Professor Karkkainen noted that:

Extensive academic literature critical of zoning has accumulated in the last twenty years, beginning with Bernard Siegan's landmark 1970 study lauding Houston's non-zoning approach, and followed shortly thereafter by Robert Ellickson's broader theoretical critique of zoning. Subsequent academic literature has been almost as uniformly critical of zoning as public policy has been uniformly in favor of it. Although few academic defenders of zoning have stepped forward, governmental decision-makers have proceeded with zoning apace, apparently untroubled by the academic onslaught.[15]

Government zoning laws do not merely operate more arbitrarily and less efficiently than voluntary restrictive covenants, they also crowd out these private arrangements. In some cases this occurs because voluntary restrictive covenants are prevented by law or because the government arrogates to itself large areas of land and refuses to contractually restrict future development in these areas, relying instead on zoning laws that government officials can change unilaterally.[16] Indeed, one of the most common instances of controversy and anguish in local government administration occurs when a government sells or rezones previously vacant government land near to or inside existing residential areas for property development. Such cases show the illusory nature of zoning laws in binding government decisions. Even where voluntary restrictive covenants are not restricted by law, and government is not the owner of land that is subject to some proposed restriction, government-zoning laws often crowd out private arrangements simply by giving property owners the false assurance that "the government will take care of it." Thus, in addition to being inherently coercive, zoning laws derogate from more efficient and effective voluntary arrangements.

Pollution, noise and property rights

Of course, there is one situation in which libertarians countenance forcible restriction of property development or use without any contractual agreement. That is the case where the development or use of property is itself an aggression against another person or their property — that is, where a particular property development or use violates the property rights of another. This can occur in cases where a development or use of property produces excessive pollution or noise to surrounding properties or invades their space.[17] Thus, opening a coal-fire power station or an oil refinery in the middle of a residential neighborhood may legitimately be prevented by residents, since the pollution would involve a violation of their property rights.

Force may legitimately be used only to prevent actual property invasions by others and not merely to prevent noninvasive actions that detrimentally impact upon our enjoyment of our property. For example, in the absence of some voluntary restrictive covenant, there is no inherent right to prevent one's neighbor from keeping a car body in his front yard or painting his garage an unsightly color. This is the case even if the aesthetic distaste for this ugliness is widespread, such that it impacts the market value of adjoining properties — there is no such thing as a right to preserve the value of one's property, only its physical integrity. Moreover, this is true regardless of whether one is speaking of the objective market value, the subjective value to the property owner, or any other measure of value.[18] People are entitled to protect the integrity of their property from invasive acts by others; they are not entitled to forcibly prevent legitimate acts by others merely to protect the market value of their property.

Economic calculation and efficiency

Notwithstanding that there is no inherent right to the subjective or market value of one's property, the existence of private-property rights and consequent market value is very useful for the purposes of economically efficient decision making. When property is privately owned and traded it acquires a monetary value, allowing it to be compared with other factors of production and use. This allows people to undertake rational economic calculation in matters involving property and property restrictions and thereby make decisions that do not squander scarce resources. Zoning restrictions that are formulated as enforceable property rights under voluntary restrictive covenants would be capable of creation or repeal by voluntary agreement, including agreements involving monetary payment. It follows that these restrictions would also acquire a monetary value, allowing for rational economic calculation and better economic efficiency. By knowing the monetary value of a restrictive covenant, people would be able to determine whether these assurances are worthwhile to them, when weighed off against other goods.

In order to take advantage of the greater certainty and efficiency of voluntary zoning, property owners and others concerned about neighborhood development should seek the repeal of coercive zoning laws and the privatization of existing government land holdings. This would prevent voluntary development and use restrictions from being crowded out by government, and would allow property owners and others to enter into restrictive covenants that are adjudicated by objective contractual agreement rather than by the vicissitudes of political lobbying and bureaucratic whim.

Obama Stamp Is on Finance Rules

Detailed Plan on Retooling the Sector Ensures White House Will Get Credit or Blame

DAMIAN PALETTA

WASHINGTON -- In drafting its proposed revamp of financial-sector regulation, the Obama administration sought to leave few of the initial details to Congress, a risky strategy that could pin much of the plan's success or failure on the president himself.

The exhaustive series of meetings and nitty-gritty debates that forged the comprehensive plan -- to be presented to Congress Wednesday -- contrasts with the way the administration has approached other priorities, such as health care and energy policy. In those cases, the White House has left the fine print to be filled in by Congress.

Journal Community

• Discuss: Would the proposed financial regulation overhaul prevent another crisis?

The different approaches reflect how some of the administration's most senior officials are personally invested in the finance overhaul, worried that political tinkering by lawmakers could undermine their goals. Others say the package only works if all the pieces are designed to fit together.

"We identified lots of options and we approached some of them with presumptive answers, but in a way nothing was nailed down until it was all nailed down because so much of this is interconnected and interrelated," said Treasury Department Deputy Secretary Neal Wolin.

Inner Circle on Overhaul Plan

Some members of the team that is helping to hammer out President Obama's detailed proposal to revamp regulation of the U.S. financial sector.

Bloomberg News

Cass Sunstein, a constitutional-law expert from Harvard Law School.

US Department of the Treasury

Neal Wolin, Treasury deputy secretary.

US Department of the Treasury

Michael Barr, Treasury assistant secretary.

Bloomberg News

Diana Farrell, deputy director of the National Economic Council.

US Department of the Treasury

Patrick Parkinson, a markets expert who took a leave from the Federal Reserve.

Roughly once a week, sometimes more, the team met with Treasury Secretary Timothy Geithner or National Economic Council Director Lawrence Summers to run through ideas. Mr. Summers became known for his ability to shred and discredit any idea presented, forcing aides to scramble to defend their proposals.

"The challenge for many people...is that he can argue both sides of an argument better than anyone," said Diana Farrell, deputy director of the NEC.

Officials now feel that this exercise with Mr. Summers, which left some red-faced at the time, will make it much easier to defend their ideas on Capitol Hill.

The plan would bring sweeping changes to the way financial markets are overseen, empowering federal regulators and limiting the amount of risk financial companies can extend. It also would allow the government to take over and break up large firms, boost consumer protections and push for changes in the way loans are securitized.

The core work was handled by a group of aides, led by Mr. Wolin and Ms. Farrell, that met most weekdays at 1 p.m. Because there were so many topics, officials broke discussions into groups. Sometimes meetings began with 15 priorities and officials only worked their way through four.

"It was a lot like doing dishes," said Ms. Farrell. "Just when you think you are done, and just as you are putting the last plate away, a whole new set of plates comes forward."

The team was built to have contrasting views so officials could debate a wide range of alternatives. Key players included Treasury Assistant Secretary Michael Barr, an expert on financial institutions and consumer protection; Cass Sunstein, a constitutional-law expert who joined the White House from Harvard Law School; and Patrick Parkinson, a markets expert who took a leave from the Federal Reserve to join the Treasury Department.

One debate that consumed the team was whether to oversee systemic risks through the Fed or give more power to a council of regulators. At a recent meeting, one aide said it was better to go to war against a committee than with one, an observation that led to a focus on giving the Fed more power.

The group also debated what to do with firms that pose a systemic risk to the economy. It was ultimately decided that the most efficient way to oversee such companies was to push them to register as "financial holding companies," which would bring them directly under Fed supervision.

People involved in the process described it as unique because, at least so far, insiders have driven the agenda without substantial pressure from outsiders.

"By no means were they saying 'Give us your ideas and we'll do what you want,'" said John Taylor, chief executive of the National Community Reinvestment Coalition, who met with the group several times. "We have no illusions."

Russia Divides and Rules Europe

A single energy market would allow the EU to turn the tables on Moscow.

FREDRIK ERIXON From today's Wall Street Journal Europe.

Few issues elicit so much passion and anger in otherwise sterile European Union politics as Russia's energy power. Concerns over the big Eastern neighbor have consumed EU summits over the past year more than all other European matters put together. Too often Europe's approach has oscillated between short-sighted interest in the next energy deal and utopian confidence in its capacity to influence Russia's strategic thinking.

Brussels' strategy for dealing with Moscow has principally been commercial. By making Russia dependent on European markets and investors, the EU hoped it could get Moscow to respect international commercial and political rules and become a good world citizen. The core of this strategy was to guide Russia into the World Trade Organization and subsequently lead the region toward a grand trade pact, including former Soviet Union countries outside the EU.

This strategy has failed so far because Russia believes it has a better one: making Europe dependent on its energy and controlling its neighbors' energy exports. The EU has been paralyzed in the face of Russia's vision of integrating the region under its own security and energy umbrella.

Europe's strategy could not succeed because the EU runs a fragmented, nationalized and oligopolistic market for energy. This has allowed Russia to play a classic game of divide and rule against Europe, which will become increasingly dependent on supplies of Russian gas. As a result, there is also little Europe can do to reverse Russia's recent protectionist trend. Last year, it capped foreign investment in 42 sectors, such as automobiles, energy, finance, and telecommunications. Now Russia's Budget Committee, chaired by Prime Minister Vladimir Putin, has suggested increasing tariffs in many sectors, including metallurgy and shipbuilding, where foreigners compete with Russian producers.

Any shift in Europe's approach to Russia, and its long-term ability to root Russia in a rules-based world economy, must start with energy policy.

Accelerating EU plans to build a single market for energy would have multiple benefits. It would encourage much more competition between energy providers, bringing down prices for consumers in the process, and fuel investments in intra-European power grids. It would also help to cushion the effect on mostly East European countries when key energy exporters to Europe fiddle with pipelines -- a practice, alas, not exclusive to the Kremlin. Europe would be better able to compensate energy or electricity shortages in countries such as Bulgaria or Hungary the next time Ukraine or Russia reduces gas supplies to the region. Moreover, it would give Europe greater market power to fight anti-competitive behavior by Russian energy companies like Gazprom.

This is a classic EU-style bottom-up strategy: When it opens up and liberalizes internally, it grows stronger externally and can leverage its market power to get other countries to open up and respect rules as well. Europe's efforts to make Russia play by international rules by getting it into the WTO, though, are unlikely to succeed. But it's not entirely clear that Russia really wants to join this trade organization.

A better strategy would be to use Russia's existing commitments as a signatory to the Energy Charter Treaty to make it respect international rules. Unsurprisingly, Russia does not like the ECT because it is one of the few international treaties that actually could constrain Russia's energy power games. Moscow claims, correctly, that it has signed but not ratified the ECT. It also claims, wrongly, that it is therefore not bound by this treaty. When signing the ECT, Russia agreed to apply its rules even before ratification.

To confuse matters further, President Dmitry Medvedev has recently proposed a new global energy charter that would cover all energy sources and include the world's energy exporters and importers. EU Commission President José Manuel Barroso has wisely turned down Mr. Medvedev's invitation for the EU and Russia to jointly spearhead this new energy pact. But in some European quarters, like Germany, this idea has received a warm response.

The plan is so unrealistic that it's real purpose can only be to distract the EU from its energy problems with Russia. Consider that any progress on such a global charter would depend on progress in nuclear power negotiations with countries such as Iran or North Korea or on Hugo Chavez's agreement to investment protections in the energy sector; both are unlikely.

Only people smitten by political romanticism could seriously propose a global accord on energy. One can accuse the Kremlin of many things but a fable for romance is not among its faults.

Europe cannot act as a regional superpower when it does not have a common commercial policy on the issue that matters most to its Eastern neighbors.

Constant crisis summitry over Russia might make for excited headlines. But Europe works best when it is boring, such as when it laboriously works on its single market. Creating such a market for energy would get Moscow's attention.

Mr. Erixon is director of the European Center for International Political Economy.

The Sotomayor Rules

Some were made to be broken.

• By KIMBERLEY A. STRASSEL

President Barack Obama has laid down his ground rules for the debate over Supreme Court nominee Sonia Sotomayor. The big question now is whether Republicans agree to play by rules that neither Mr. Obama nor his party have themselves followed.

Ismael Roldan

Ground Rule No. 1, as decreed by the president, is that this is to be a discussion primarily about Judge Sotomayor's biography, not her qualifications. The media gurus complied, with inspiring stories of how she was born to Puerto Rican immigrants, how she was raised by a single mom in a Bronx housing project, how she went on to Princeton and then Yale. In the years that followed she presumably issued a judicial opinion here or there, but whatever.

The president, after all, had taken great pains to explain that this is more than an American success story. Rather, it is Judge Sotomayor's biography that uniquely qualifies her to sit on the nation's highest bench -- that gives her the "empathy" to rule wisely. Judge Sotomayor agrees: "I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion [as a judge] than a white male who hasn't lived that life," she said in 2001.

If so, perhaps we can expect her to join in opinions with the wise and richly experienced Clarence Thomas. That would be the same Justice Thomas who lost his father, and was raised by his mother in a rural Georgia town, in a shack without running water, until he was sent to his grandfather. The same Justice Thomas who had to work every day after school, though he was not allowed to study at the Savannah Public Library because he was black. The same Justice Thomas who became the first in his family to go to college and receive a law degree from Yale.

By the president's measure, the nation couldn't find a more empathetic referee than Justice Thomas. And yet here's what Mr. Obama had to say last year when Pastor Rick Warren asked him about the Supreme Court: "I would not have nominated Clarence Thomas. I don't think that he was a strong enough jurist or legal thinker at the time for that elevation."

In other words, nine months ago Mr. Obama thought that the primary qualification for the High Court was the soundness of a nominee's legal thinking, or at least that's what Democrats have always stressed when working against a conservative judge. Throughout the Bush years, it was standard Democratic senatorial practice to comb through every last opinion, memo, job application and college term paper, all with an aim of creating a nominee "too extreme" or "unqualified" to sit on the federal bench.

Mr. Obama knows this, as he took part in it, joining a Senate minority who voted against both Chief Justice John Roberts and Justice Sam Alito. Mr. Obama also understands a discussion of Judge Sotomayor's legal thinking means a discussion about "judicial activism" -- a political loser. In a day when voters routinely rise up to rebuke their activist courts on issues ranging from gay marriage to property rights, few red-state Democrats want to go there. Moreover, a number of Judge Sotomayor's specific legal opinions -- whether on racial preferences, or gun restrictions -- put her to the left of most Americans.

Which brings us to Ground Rule No. 2, which is that Republicans are not allowed to criticize Judge Sotomayor, for the reason that she is the first Hispanic nominee to the High Court. The Beltway media also dutifully latched on to this White House talking point, reporting threats from leading Democrats, including New York Sen. Chuck Schumer, who intoned that Republicans "oppose her at their peril."

This would be the same Mr. Schumer who had this to say about Miguel Estrada, President Bush's Hispanic nominee (who, by the way, came to this country as an immigrant from Honduras) to the D.C. Circuit Court of Appeals in 2002: Mr. Estrada "is like a Stealth missile -- with a nose cone -- coming out of the right wing's deepest silo." That would be the same Mr. Schumer who ambushed Mr. Estrada in a Senate hearing, smearing him with allegations made by unnamed former associates. That would be the same Mr. Schumer who sat on the Judiciary Committee, where leaked memos later showed that Democrats feared Mr. Estrada would use a position on the D.C. Circuit as a launching pad to become the nation's . . . first Hispanic Supreme Court judge. Two tortured years later, Mr. Estrada withdrew, after the Democrats waged seven filibusters against a confirmation vote.

Republicans will be tempted by this history to go ugly. They might instead lay down their own rules, the first being that they will not partake in the tactics of personal destruction that were waged by the left on nominees such as Mr. Thomas or Mr. Alito or Mr. Estrada. But the party could also make a rule to not be scared away from using Judge Sotomayor's nomination, or future Obama picks, as platforms for big, civil, thorough debates about the role of the courts and the risk of activist judges to American freedoms and beliefs.

Cautious Optimism Rules Markets

Market Starts to Soar As FASB Changes Rules