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Monday, December 20, 2010

"Is Regulation Really for Sale?"

Howard Davies, chair of the UK's Financial Services Authority from 1997-2003, defends regulators against the claim that they are bought and sold by the financial industry (though he's less sure about legislators), but admits they were subject to "intellectual capture" prior to the crisis:

Is Regulation Really for Sale?, by Howard Davies, Commentary, Project Syndicate: ...in narratives of the financial crisis, regulatory capture is often an important part of the story. ... How plausible is this...? Can ... regulation really be bought?
When I was a regulator, I would certainly have denied it. I had never worked in the financial industry, and knew few people who did. ... My successors have all come from the financial sector, however...
I have no first-hand knowledge of the legislative process in the United States. But, as an outsider, I am amazed at the apparent intensity of lobbying, and at the amounts of money that firms and their associations spend. Is it effective? ...
An intriguing sidelight on the relationship between Congress and business is provided in a study by Ahmed Tahoun of the London School of Economics on “The role of stock ownership by US members of Congress on the market for political favors.” ... The ... results ... suggest a less-than-healthy relationship between lawmakers’ political and pecuniary interests.
Regulators are typically not subject to those temptations. They are not normally allowed to own stock in financial firms... But can they nonetheless be captured?
I see two potential grounds for concern. The first is the revolving door between the industry and regulatory bodies. This is more prevalent in the US...
The second concern is what one might call intellectual capture. While I would strongly argue that the FSA in my day did not favor firms unduly, it is perhaps true that we – and in this we were exactly like US regulators – were inclined to believe that markets were generally efficient. If willing buyers and willing sellers were trading claims happily, then, as long as they were “professional” investors, there was no legitimate reason to interfere in their markets. ...
We now know that some of these market emperors had no clothes, and that their activities ... could result in severe financial instability and generate serious losses for taxpayers, not to mention precipitating a global recession. That has been a grave lesson for regulators and central banks.
So intellectual capture is a charge hard to refute. But were regulators surrogate lobbyists for the financial industry? I do not think so, and to argue as much devalues the efforts of many overworked and underpaid public servants around the world.

"Is Regulation Really for Sale?" The intellectual capture Davies owns up to was no accident, it was the product of a concerted effort -- funded in part by big money interests on the right -- to sell these ideas to policymakers, regulators, and the public more generally. And as Paul Krugman's column notes today, it's an effort that had and continues to have considerable success. Thus, I don't think we can separate intellectual capture from lobbyist and other activity promoting the free market, anti-regulation point of view.

    Posted by on Monday, December 20, 2010 at 12:15 PM Permalink  Comments (11)


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