After reading a highly informative article in the December issue of Harper’s magazine about the health care debacle, I am seeing the concept of regulatory capture everywhere I look now and find it to be a useful construct to help explain the current stasis in our national political scene. Regulatory capture is used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating.
Here is the opening paragraph of the editorial, penned by Luke Mitchell, a senior editor at Harper’s:
The idea that there is a competitive “private sector” in America is appealing, but generally false. No one hates competition more than the managers of corporations. Competition does not enhance shareholder value, and smart managers know they must forsake whatever personal beliefs they may hold about the redemptive power of creative destruction for the more immediate balm of government intervention. This wisdom is expressed most precisely in an underutilized phrase from economics: regulatory capture.
Then I read this article from the January/February issue of Mother Jones, and realized that President Obama’s singular failure this year has been his lack of effort to rein in the excesses of Wall Street. The most plausible explanation is that the people writing and enforcing the rules are all from the banking industry. Coupled with the vast amounts of money that the banking industry spends on lobbying politicians from both sides of the (imaginary) aisle — including more to Democrats than Republicans in 2008 as the too big to fail logic became mantra — and you have a recipe for disaster that we will no doubt experience again in the future without a paradigm shifting federal intervention. An excerpt:
This was the financialization of America, as Wall Street evolved from providing financial services to creating products—junk bonds, credit default swaps, subprime loan securitization, collateralized debt obligations—designed to allow Wall Street itself to prosper. By the height of the credit bubble between 2000 and 2007, the financial industry earned a staggering 40 percent of all corporate profits recorded in the United States, four times what they earned in 1980. Over the same period, average pay on Wall Street doubled, while bonuses at the top sextupled.
It was, depending on your perspective, either a vicious circle or a virtuous one. Deregulation produced vast profits, and those profits in turn provided the money to lobby for further deregulation. It was this ocean of money that allowed the financial industry to spend nearly $500 million on political contributions in just a single election cycle, and it was those contributions that helped keep so many flagrantly abusive—but profitable—practices alive and well. It was, for example, what allowed Big Finance to keep Congress from banning “universal default,” the small-print declaration on millions of credit card applications that banks could retroactively raise interest rates on consumers at any time for any reason.
It was why the FBI’s warnings of an “epidemic” of mortgage fraud as early as 2004 were completely ignored.
It’s why no one ever did anything about the multibillion-dollar abuse of the “yield spread premium,” a kickback paid to mortgage brokers for guiding their customers into higher-interest loans than they qualified for.
It was why the Fed ignored years of pleading from community groups to do something about abusive mortgage lending.
It’s why the credit card industry could afford to spend 10 years and $100 million lobbying for a punitive bankruptcy bill that, among other things, made it harder to write off credit card debt.
It’s why banks are paid fat subsidies to make government-backed student loans even though the Congressional Budget Office estimates taxpayers would save $80 billion over 10 years if the government made the loans outright.
It’s why Hawaii Sen. Daniel Akaka’s bill to require a warning to consumers about how long it takes to pay off a credit card balance if you make only the minimum payment was effortlessly swatted aside year after year.
It’s how the late Delaware Sen. William Roth (also the creator of the Roth IRA, another bank windfall) could get away with slashing tax audits on the superrich by doing nothing more than holding transparently comical hearings in 1997 and 1998 that portrayed IRS agents as jackbooted thugs who kicked down doors and held guns to young girls’ heads while forcing them to undress.
The concept of regulatory capture would also explain why Altria, after bleeding billions of dollars to attorneys general all over the country, decided to support legislation that would allow the FDA to regulate the company and others like it, as detailed in this article from the Business section of the New York Times Sunday edition.
Maybe the above cartoon is not too far from the truth?
My favorite example is the USDA. Food industry specialist Marion Nestle frequently comments on USDA’s sketchy dealings with salmonella-infested peanut butter, melamine in Chinese yogurt, and the “safety” of eating cloned meat. http://whattoeatbook.com/tag/fda/