The New Jersey Star-Ledger—an unwavering pro-regulation champion—ran an op-ed titled Wall Street banks and federal regulators are still too chummy. This interesting piece actually exposes the essentially corrupt nature of government regulation of business:
Another cortex-shattering example of Wall Street’s unfettered existence arose last week, with reports about the chummy relationship between banking leviathan Goldman Sachs and the agency that is in charge of its regulation, the Federal Reserve Bank of New York.
Goldman . . . has Fed regulators literally working inside its office, ostensibly acting as a watchdog who keeps the bank on good behavior.
That can lead to what is known as regulatory capture. If that sounds like a body-snatching thing, it's in that vein: They become pals, banks co-opt the regulators, and the rules become fungible.
Given that all-encompassing nature of banking regulation, how do the editors expect regulators to do their jobs without having offices inside the largest banks? No answer. Since banks’s very survival depends on satisfying regulators, what’s so surprising about bankers cultivating relationships with the people who have a stranglehold on their careers? Does anyone seriously believe bankers would be better off antagonizing the regulators? And as for the regulators, the editors write:
After that crash, The Fed commissioned a report to investigate how it screwed up so egregiously. This report, from a Columbia finance professor named David Beim, found that the Fed was too risk-averse and admiring of banks that it was meant to regulate, and that a culture of leniency prevailed.
Were regulators afraid to challenges their bosses? Absolutely, the report said. Were examiners afraid to alienate banks that could be their next employer? The Beim report didn’t speculate, but NPR reports that seven former Fed examiners now work at Goldman.
Regulators are just as human as bankers. That’s something statists regularly ignore, because that reality clashes with their implicit mystical view of government officials as omniscient, infallible, and superior in wisdom. But remember that the “culture of leniency” prevailed in the context of a housing bubble-led economic boom. Why would regulators challenge their bosses, who were beholden to politicians who run on the booming economy? And by what fantasy do the editors think that regulators are not motivated by the same career incentives as anyone else? Why on Earth would they want to “alienate banks that could be their next employer?” And for that matter, why wouldn’t Goldman want former regulators and their connections inside the government regulatory agencies on it’s payroll? They’d be foolish not to.
What the editors expose is not bad regulation, but the very bad nature of regulation, which leads to corruption because regulation itself is inherently corrupt.
To top it off, there was this predictable nugget:
For two decades, the Ayn Rand disciple [Fed Chairman Alan Greenspan] shunned most forms of regulation and let Wall Street operate like it was the Wild West, literally ignoring fraud because he thought the market could overcome anything.
The result was a global catastrophe, and an old man admitting that his ideology was tragically flawed, as Greenspan was pummeled into historical infamy by an angry Congress.
I left these comments:
There’s some truth here. Banks are so heavily regulated that regulators actually have offices inside the banks. Cozy relationships between banks and regulators? That’s the nature of government regulations. With their business so straight-jacketed, what else can anyone expect of bankers, but [to] get “chummy” with the regulators? This unholy alliance of business and government wouldn’t exist in a free market banking system, where the government prosecuted fraudsters and other wrongdoers but left innocent people free to operate.
That said, there are fallacies here.
First, Greenspan’s butt-covering pronouncements to the contrary, banking regulations increased dramatically in the decade prior to the crash.
Second, Greenspan was not an “Ayn Rand disciple.” He was the Chairman of the Federal Reserve Board, the biggest bank regulatory agency and owner of the monetary system. They are diametric opposites.
If you want to see a real Ayn Rand disciple in action, consider John A. Allison, who successfully guided one of the big ten financial institutions, BB&T, through the housing boom, bust, and financial crisis by avidly avoiding (as much as regulators allowed) sub-prime lending. BB&T consequently emerged as one of the strongest banks.
At the time of the crash, Allison was the longest-serving bank CEO in the United States. He is on Harvard Business Review’s top 100 most successful CEOs of the decade. His experience through good times and bad—38 years at BB&T—warrants respect. Anyone with a modicum of objectivity and honesty should read Allison’s insider's’ view of the 2008 crash; his book “The Financial Crisis and the Free Market Cure.” As Allison notes, the problem wasn’t under-regulation. It was mis-regulation. One example of mis-regulation was mark-to-market accounting rules—imposed under Bush’s big regulatory bill, Sarbanes-Oxley—which needlessly accelerated the financial death spiral and wasn’t corrected until well into 2009, too late to save the economy.
Whereas Greenspan was a financial crisis culprit because he abandoned Ayn Rand principles, Allison saved his bank because he adhered to Ayn Rand’s Aristotelian principles.
The primary culprit for the 2008 crash was government intervention into the housing and mortgage markets—specifically, the Federal Reserve Bank and the politicians’ “affordable housing” policies and crusades. Bad banks were only a secondary cause. The politicians pushed sub-prime lending on the banks through the regulatory apparatus and the GSEs Fannie and Freddie, fueled by the Greenspan Fed’s bubble-inflating easy money policies.
Contra statist apologists, government officials are not omniscient, infallible, or superior in wisdom. They are subject to the same incentives as everyone else, including protecting their turf. Just as statists perpetrated the Big Lie that unregulated markets caused and exacerbated the Great Depression, so they are perpetrating another Big Lie; that deregulated markets caused and exacerbated the Great Recession. Statists and their apologists are perpetrating this new Big Lie to protect and expand their power over the economy.
The Financial Crisis and the Free Market Cure—John A. Allison