Regulators Intentionally Asleep At The Switch

Can regulations avert the next crisis?

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Thomas Frank in the Journal today makes the now-familiar argument that financial regulations failed to avert the economic crisis not just because of the regulations themselves, but because of the people in charge of enforcement. The regulators were unduly influenced by the industries they were supposed to regulate. This is by no means a recent phenomenon, and Frank goes back to this historical example:

The first federal regulatory agency, the Interstate Commerce Commission, was set up to regulate railroad freight rates in the 1880s. Soon thereafter, Richard Olney, a prominent railroad lawyer, came to Washington to serve as Grover Cleveland's attorney general. Olney's former boss asked him if he would help kill off the hated ICC. Olney's reply, handed down at the very dawn of Big Government, should be regarded as an urtext of the regulatory state:

"The Commission . . . is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things. . . . The part of wisdom is not to destroy the Commission, but to utilize it."

Frank rightly points out that it doesn't make much sense to add new regulations to the books without addressing this problem of regulatory capture. But what Frank doesn't say is how the problem could be addressed. It's not really a matter of having the "right" politicians in place--he points out that Republicans and Democrats alike have been captured by special interests when making appointments.

It seems to me unavoidable that as long as we have large regulatory apparatuses, the powerful people with the most to lose or gain from these regulations will have undue influence over the regulators, simply because it's worth it to them to invest the time and money in lobbying. The average person in the street might be influenced indirectly by these regulations, but it's not the same. Frank basically says that Obama needs to try harder on this issue, but I fear this is an area where hope is not enough.