Financial Regulation & Regulatory Capture
(Photos by Robin Holland)
This week on the JOURNAL, Bill Moyers spoke with financial experts Simon Johnson and James Kwak about Wall Street's influence in Washington and their support for new financial regulation that might reduce the banks' power.
James Kwak explained why he and Johnson advocate for more financial regulation, including breaking up America's largest banks:
"It used to be maybe eight or nine banks. But what's happened over the last two years is that these banks have gotten bigger, because they've bought each other. They've become more powerful. And they have an even stronger market position in some key markets like credit cards, mortgages, equity underwriting, and derivatives. And when we talk about the problem, when we talk about the need to break up these banks, we're really just talking about six banks, which are pretty undebatably too big to fail and therefore have an enormous amount of leverage over the government... What we learned in 2008 were certain institutions are so big and so interconnected that if they were to fail, they would cause systemic shocks throughout the economy. That's essentially what happened in September 2008 when Lehman Brothers collapsed... Almost two years later, nothing has changed. Or the only change is that these banks have gotten larger, more powerful, both economically and politically. And they've been flexing their muscles in Washington for the last year and a half."
Bill Moyers asked why new financial regulations would work when past efforts at reform have ultimately failed:
"Over the course of my lifetime, and my working career as a journalist, I've seen one regulatory agency after another taken over by the very industries they were supposed to regulate. Regulation requires a President who is committed to tough regulation. If you get a free market President like George W. Bush, you get regulation serving the industry... If you get a Democratic Party that's been compromised by its concessions and capitulations and contributions from Wall Street, you get a regulatory system that is a joke, and that's what we have. What's to ensure that the next regulatory system won't be a joke?"
Simon Johnson replied:
"The person who nailed this intellectually a long time ago was from the University of Chicago. George Stigler, not a man of the left, got a Nobel Prize [for concluding that] all industries end up with the industry capturing the regulators. What's happened to us is exactly what Stigler warned against, on a massive scale. The Administration still argues that we should delegate responsibility, going forward, for lots of things around finance - like how much capital you should have - delegate that to the regulators... Now that's crazy. That's not acceptable. That's not what they should do, particularly because any Democrat should say 'well, wait a minute, the next free market president who doesn't believe in regulation [that] comes in will gut the system.' And any person from the right who's read Stigler should say 'well, those regulators are just gonna get captured.' You've got to put it in legislation. You've got to design the legislation. You've got to go after the things that can be legislated. Congress must not abdicate this responsibility."
What do you think?