Reckless Endangerment
The title of the latest crisis book is “Reckless Endangerment”. Authors Grechen Morgenstern and Josh Rosner sat down with Aaron Task at Yahoo’s Tech Ticker to review the role of the regulators in our crisis. Theirs is a story of regulatory capture in which, under the influence of lobbyists from the housing and mortgage industry, financial regulators stripped away regulatory controls and refused to apply existing regulations.
(Video below)
Source: The Fed’s “Fatal Flaw”: Morgenson & Rosner on Why Nothing’s Changed Since the Crisis – Tech Ticker
Regulatory capture is prevalent across all the western nations that are in trouble, even if the problems are not apparent yet because of a flood of central bank liquidity programs. Look at Ireland to see regulatory capture at its most extreme.
Agreed. The way to get around capture i two-fold. First, separate the regulators from the regulated. No revolving doors, no incestuousness. Second, create a market structure that allows for failure so as to prevent moral hazard even with regulatory capture. There’s no getting around capture; it will always be a factor. But it can be mitigated.
You can end capture by making lobbying a bar to any government support or contracts. For the banks lobbying was like an insurance policy it made sure that government was ameniable to a bail out of a large failed bank. Make it a criminal offence for anyone to transferred from a regulator to a company that it regulated at any point in their career. The US police have an alternative career structure for Internal Affairs. make it such that regulators have a career structure away from banks.
Also cap company political funding or better still ban it.
Regulatory capture is prevalent across all the western nations that are in trouble, even if the problems are not apparent yet because of a flood of central bank liquidity programs. Look at Ireland to see regulatory capture at its most extreme.
Agreed. The way to get around capture i two-fold. First, separate the regulators from the regulated. No revolving doors, no incestuousness. Second, create a market structure that allows for failure so as to prevent moral hazard even with regulatory capture. There’s no getting around capture; it will always be a factor. But it can be mitigated.
You can end capture by making lobbying a bar to any government support or contracts. For the banks lobbying was like an insurance policy it made sure that government was ameniable to a bail out of a large failed bank. Make it a criminal offence for anyone to transferred from a regulator to a company that it regulated at any point in their career. The US police have an alternative career structure for Internal Affairs. make it such that regulators have a career structure away from banks.
Also cap company political funding or better still ban it.
It’s dangerous to use the words “regulatory capture” because it plays right into neoclassical economists’ hands. See “public choice theory of regulation” for details.
Payam Sharifi the neoclassicals like Stigler are right about capture. They are not necessarily right about what it means regarding policy. My first takeaway from capture is that it means building robustness into the ecosystem to allow for failure without relying on the regulator. The second is to find good regulators who will enforce the rules and create a level playing field