Regulatory capture is a term used to refer to situations in which a government 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.
The SEC and other government posts like the Secretary of Treasury are unduly influenced by the finance industry. In fact, as the article points out, those government positions are often filled with alumni from the finance industry.
This is the first good article I've found that shows parallels between corruption or monopolistic/oligopolistic behavior in developing nations and the current U.S. system, written by an old IMF practitioner:
-banks too big in size
-banks influence policy (treasury officials are often former bankers)
-advice on what happens when developing nations wreck their financial system and what is usually necessary to heal
-argument for why nationalization of banks makes sense
Who could provide better advice than an organization that routinely deals with these kinds of failures? It turns out, this kind of stuff happens all the time... just not here in the U.S.
Granted, I don't know enough about the track record of the IMF. Them sort of being the 'Emergency Room' staff for failed nations does give them insights into typical reasons for malfunction. I don't really have a grip (and most people don't) on how these huge sums here in the U.S., e.g. 4-5 trillion dollars estimated in bad assets on the books, add up. Reading Krugman/ de Long/ Cowen/ Kedrovsky etc. still hasn't given me enough perspective. So I'd like to see some input from people that know all the angles on how crooks get away with money! Their experience from developing nations is helpful.
> Them sort of being the 'Emergency Room' staff for failed nations does give them insights into typical reasons for malfunction.
Which doesn't help, and may hurt, because we're not failing for "typical reasons".
> So I'd like to see some input from people that know all the angles on how crooks get away with money! Their experience from developing nations is helpful.
If that's your reason for thinking that the IMF will help, it's almost certainly wrong.
Think of it this way. Does skill at catching shoplifters help if you're trying to stop murderers?
Note that the bulk of the IMF's activities are "development", which often ends up bankrupting the country.... That's not to say that such countries wouldn't have failed anyway or that contries don't fail without IMF help, just that IMF involvement doesn't necessarily end up with ponies and kittens.
Don't take my criticism of the IMF as support for the current batch of US folks - it isn't. (Pretty much every one of Fed Chairman Bernake's predictions has been horrifically wrong.) I'm just pointing out that it's quite possible for the IMF to be even worse.
Remember, that it's always possible to make things worse. (Better and worse are both changes.)
Well, I was hoping for a fresh outside perspective. We here in the U.S. have been shafted for so long that we've got 'Stockholm Syndrome'. It's time for some wrath - nothing better than an institution that deals with 3rd world dictators to call out breaches of law.
You could call it 'ethical awareness' that an outside perspective can contribute. Granted, given actual policy, the U.S. situation is unique and therefore the IMF's experience might not directly apply, e.g. I don't think that too many developing nations failed because of 'credit default swaps'. However, many bankers currently (and in the past) are in policy positions, and suddenly the lessons from corruption and aggregation of power in 3rd world countries apply.
> It's time for some wrath - nothing better than an institution that deals with 3rd world dictators to call out breaches of law.
The IMF doesn't "deal with" 3rd world dictators or "call out breaches of law".
> You could call it 'ethical awareness' that an outside perspective can contribute.
And you could call it a pony for all the good it would do.
"Outside" doesn't tell you anything about the value of a perspective.
> However, many bankers currently (and in the past) are in policy positions, and suddenly the lessons from corruption and aggregation of power in 3rd world countries apply.
If you're arguing that "IMF bankers will fix things", you're ignoring the fact that IMF bankers are what got us into this and we're currently using IMF bankers. (Guess where the current treasury secretary used to work.)
If you're arguing that the IMF is used to dealing with corrupt bankers, you're simply wrong.
And, if you're arguing that the US has problems because of corrupt bankers, you don't know anything useful about said problems.
> Well, I was hoping for a fresh outside perspective.
Hope is not a plan. Change is not necessary good. And an outside perspective isn't necessarily relevant. (Different can be good or bad.)
And, it's not "fresh".
> We here in the U.S. have been shafted for so long that we've got 'Stockholm Syndrome'.
One of the symptoms is grasping at anything, without regard for whether it actually helps or is even relevant.
So, to end on a positive note, it's likely that you've accurately explained why you're thrashing around uselessly.
Excuse me please, Sir. This is just language mumbo-jumbo you're playing here... slicing and dicing things that can be interpreted in any fashion you want to. My points are perfectly valid: that aggregation of power in the U.S. financial system has led to hazards and that a comparison to developing nations can lead to insights on power abuse.
The next time you slice and dice me like this I'll call it out for what it is: trolling. You can't just take apart sentences and push them back slanted with any angle you want to spin on them.
Further, the decisiveness in which you answer, e.g. "you could call it pony", 5 x "you're wrong", "uselessly", "hope is not a plan" is inappropriate. You are not on solid ground yet your language suggests so.
I have been to graduate school in economics at one of the best schools in the world. My friendly language in which I try to accommodate other views is not an invitation to ignite fickle territorial battles. Geez, this is getting narrow-minded.
> that aggregation of power in the U.S. financial system has led to hazards
Yes.
> and that a comparison to developing nations can lead to insights on power abuse.
You've yet to show that the different aggregations have any useful similarity. You've misstated what the IMF does, you've misstated the IMF's success rate, and you've ignored how IMF folk have been involved.
> The next time you slice and dice me like this I'll call it out for what it is: trolling.
"call it out"? Playground. (Also, that's not what trolling means.)
Yes, I'm being blunt, but you're babbling. There's a good reason why you're not citing any supporting facts.
We're currently at I'm mean but correct and you're nice and wrong. I can live with that.
> You can't just take apart sentences and push them back slanted with any angle you want to spin on them.
Feel free to show how I've twisted your words or made factual errors.
I have not misstated what the IMF does, I have not pegged the IMF to a defined success rate nor have I ignored or somehow covered up involvement of IMF staff. I know that you could interpret that I might have meant that, but I did not exactly say that.
Overly aggressive or pointed responses on discussion boards do count as trolling in my book. Regarding these quick cut-and-paste responses of yours: I could write a simple program that extracts a sentence with a high density of technical words, then puts a forward arrow before it, trails it with a linefeed and then inserts a random response, such as "you're babbling" or "you're wrong", or just states the opposite of the statement (that's more difficult). How about a coherent response using the English language?
I don't need to point out how exactly different aggregations of power have any useful similarity, since we are still in research mode here. My central point remains valid (we need all the input we can get), and actually so does yours, which was about questioning the track record of the IMF.
> I have not misstated what the IMF does, I have not pegged the IMF to a defined success rate
Who wrote "Who could provide better advice than an organization that routinely deals with these kinds of failures?" I'll admit to assuming that the author meant "successfully deals", but I'll be happy to retract if said author elaborates to "unsuccessfully deals" and explains why failures in unrelated situations are a qualification in ours.
> Overly aggressive or pointed responses on discussion boards do count as trolling in my book.
And if your usage was definitive, that would be enough. Feel free to use personal definitions, but if you're going to communicate with other people....
I note that you still haven't shown where I'm wrong or supported your "facts".
> I don't need to point out how exactly different aggregations of power have any useful similarity
Sure you do, because there are many tools for "aggregations of power", but the vast majority are irrelevant because of the characteristics of said tools, power, and/or aggregations.
> My central point remains valid (we need all the input we can get)
We don't need "all the input we can get". We need to avoid the irrelevant/useless because processing input has a cost.
> we are still in research mode here
If you really think that justifies any random factoid, then a list of the phone numbers from US cities would also be worthwhile.
I was sympathetic to the idea that the IMF might be useful until I started looking into it. If you think that the IMF is useful in our situation, details matter.
You keep on insisting that "more data" is a bad idea. Economics has a long tradition of learning from Economic History and comparative observation. I can't resist quoting Google here, that "more data" is the way to go, as Norvig argues (slightly out of context; field is machine-learning): http://www.computer.org/portal/cms_docs_intelligent/intellig...
I'm more or less arguing for that the IMF, or any other org. in those waters, has a lot of rich data in their possession. Well, here's an example: I worked for three years on a government-funded survey on "barter networks in Eastern Europe", where I did the number crunching on the data set... regression analysis, multivariate statistics etc. This resulted in one of the first extensive studies on contract theory in barter networks (http://www.amazon.com/Contracts-Trade-Transition-Resurgence-...). Basically in absence of cash to keep trade flowing you barter. Now if the U.S. financial system breaks down to the point where nobody can pay their suppliers and vendors etc. they'll have to pay each other with parts and other barter derivatives, passing around IOUs. Turns out, somebody looked at this and it works on a grand scale and even across borders. Anyway, there are lots of crazy ideas that you can try out and experiment with, looking at a rich data set of failed nations. I remember how expensive it was compiling all that data on barter networks (granted, we did the legwork; data was not from the IMF).
Regarding "abuse through power aggregation in developing nations" I don't have an example right now, on how that directly applies to the U.S. situation.
> You keep on insisting that "more data" is a bad idea.
Not at all. I keep insisting that irrelevant data is a bad idea. I also ask what the IMF's actual record tells us about its relevance. I also point out that the US folk involved are largely IMF folk....
I note that you haven't taken me up on my offer of the phone numbers of the US. If you actually believe that "more data" is a good idea, you'd leap on that offer as helpful for each and every problem, but you haven't.
Why don't you want my data? Does your refusal suggest that you actually believe that irrelevant data is harmful? Is it the source, that data from a mean person is harmful? What?
> I can't resist quoting Google here, that "more data" is the way to go, as Norvig argues (slightly out of context; field is machine-learning):
You might try actually reading it. Norvig is a stickler for good and relevant data.
> I'm more or less arguing for that the IMF, or any other org. in those waters, has a lot of rich data in their possession.
And I never wrote otherwise. There's rich data everywhere. The problem is getting the right data and doing something useful with it.
> Regarding "abuse through power aggregation in developing nations" I don't have an example right now, on how that directly applies to the U.S. situation.
Well, you ain't contributing anytime soon. Always replying in a sorta let-down, quick off-the-hook fashion.
What's up with the telephone book nonsense and then insinuating that I haven't read Norvig's paper, which isn't that technical btw? This is just noise.
The comparative study of failed nations does arouse my curiosity though and I think there are parallels to be found to the U.S. system. But again, this is still exploratory and requires some real work ahead. Peace.
Anamax, your point about the IMF failing developing nations is very good. There is really no evidence that IMF has ever helped anyone.
I am less sure about your point that the US not failing for typical reasons. The finance industry has influence policy to excessive degree over the last ten years and the resulting deregulation played a part in the bubble and the collapse. It is hardly the only factor but it was a factor. It's different from Third World cronyism but the article has a point that it might be considered just a variation on theme.
So I'd challenge the statement that the US did not fail in a typical fashion. The thing that's A-typical is the US wasn't just rolling out wasteful production and unjustified debt but that it has been driving the world's economy over the last twenty years while doing this.
I'd agree that IMF doesn't have any track record of helping countries - it's just a bureaucracy which has more or less required belt tightening thus forcing countries to become export oriented.
The ironic thing is that as many nations have belt-tightened and become export oriented over the last twenty years, they came to rely on the debt-rolling US to buy their products. So the final failure of the US bubble may result in world where no one drives demand, where "beggar thy neighbor" through competative devalue is the only tool left to the exporting nations which every nation will be forced to be.
Neither the IMF nor the free market would be able to get us out of that one.
> resulting deregulation played a part in the bubble and the collapse.
One small problem - deregulation didn't play a part in the collapse. It's the regulated institutions and the regulated parts of mixed organizations that failed.
Subprime mortages were a creation of regulation and were overvalued as US regulatory policy.
Regulation and tax policy encouraged US banks to hold more Fannie and Freddie stock than they would have otherwise, which guaranteed that they'd all take a hit at the same time.
The only "lack of regulation" was the US Congress protecting Fannie and Freddie. The active players here were almost all Dems. Most Repubs ignored the problem and a few got their teeth kicked in when they suggested that Fannie and Freddie should be regulated.
The Obama adminstration, starting with his Chief of staff, is full of folks who used to be Fannie or Freddie execs or board members.
That's not to let foreign regulators off the hook. Their banks and insurance companies are also failing.
In many cases, such as AIG, both US and foreign regulators were involved.
That's why the US is trying to get the unregulated institutions to bail out the regulated ones - they're the only ones left with significant assets.
Yes, I know what Fed Chief Bernake said about AIG's London operations. He was wrong about that, which shouldn't be much of a surprise given the accuracy of his predictions.
Despite considerable disagree, I always enjoy your arguments anamax
Again, I need to clarify. The various institutions of course never became absolutely unregulated but particular, symbolically important regulations were removed.
It is true that regulations like the distinction between savings banks and investment banks might not prevented similar banks maneuvers were the banks determined to engage in them.
However, it is actually important to keep in mind that a good deal of state's symbolic action toward private institutions are crucial for its limiting or not-limiting their behavior.
Throughout the financial industry, "Greenspanism", the idea that the market knows best, became the watchword of the regulators and the regulated, meaning that the regulators often failed to take action around worrisome trends. The Federal Reserve, for example, could have punctured the housing bubble at any time by saying loudly and forcefully "this is a bubble, you have to stop now". The results might not have been pretty then but they even uglier now...
Also
> Subprime mortgages were a creation of regulation and were overvalued as US regulatory policy.
I would love see documentation of this...
> Regulation and tax policy encouraged US banks to hold more Fannie and Freddie stock than they would have otherwise, which guaranteed that they'd all take a hit at the same time.
Actually, I'd see Fannie and Freddie as "poorly regulated but guarantee" institutions. Certainly the worst kind.
I certainly don't view the state as automatically good and the private sector as automatically bad. But not I also wouldn't see all state actions as good regulation or even regulation in any sense. The Post Office is owned by government and maybe regulated by the EPA. The US military, is controlled by the state but can tell the EPA to * itself and often does.
> Throughout the financial industry, "Greenspanism", the idea that the market knows best, became the watchword of the regulators and the regulated, meaning that the regulators often failed to take action around worrisome trends.
While that's commonly believed, the office of thrift supervision (the US agency that regulates banks - the name is historical), vehemently disagrees and says that the insurance regulators do as well.
I note that the chairman of the fed doesn't know what's regulated.
> The Federal Reserve, for example, could have punctured the housing bubble at any time by saying loudly and forcefully "this is a bubble, you have to stop now". The results might not have been pretty then but they even uglier now...
The fed isn't a regulator of financial institutions. Instead, it is supposed to handle monetary issues.
Note that crashing the market (via raising interest rates) wasn't politically possible, and regulators only do what is politically possible.
And, to the extent that bogus-type transactions were occurring, crashing the market wouldn't have stopped that. They'd have just gone down in proportion.
>> The Federal Reserve, for example, could have punctured the housing bubble at any time by saying loudly and forcefully "this is a bubble, you have to stop now". The results might not have been pretty then but they even uglier now...
> The fed isn't a regulator of financial institutions. Instead, it is supposed to handle monetary issues.
Whatever its official duties, the Fed is considered a central bank. Centrals banks as a rule have been considered to have wide latitude for action on the economy in general, by policy makers, by their heads, by the financial community and by the public at large. Certainly, we can see the Fed taking wide action today.
Just consider - I'm sure you know the William McChesney Martin quote that the job of the Fed is "to take away the punch bowl just as the party gets going". This means looking at the economy as a whole.
> Note that crashing the market (via raising interest rates) wasn't politically possible, and regulators only do what is politically possible.
This is indeed true. Politicians may sink to the point that they only follow immediate popular options. CEOs may lie, cheap and steal due their pathological greed. Doctor may do a bad job due to habitual incompetence. In each case, it might indeed be true that nothing was possible at the time that it happened. One nonetheless must point out what these people ought to have done, whether they really could have done it or not.
I would note that the rise Greenspanism/"market fundamentalism" itself, starting in the 1990's, certainly made it much more politically difficult to stand against Wall Street's further partying in the 2000's.
> And, to the extent that bogus-type transactions were occurring, crashing the market wouldn't have stopped that. They'd have just gone down in proportion.
This is pure speculation on your part. I could equally speculate that they would have gone down as a proportion given that the total supply of loans was now down and honest deals are more desirable than dishonest deal. Further, actual bogus loans were only the final straw which broke the back of house price inflation. At wasn't the fundamental problem. We can see a huge number of ordinary loans which are coming undone at the moment (and without the massive intervention of the Fed, there would be even more).
Yes, the fed is considered a central bank. However, it actually doesn't have any regulatory authority over financial institutions. It only has monetary powers.
No one in govt wanted the Fed to crash or slow down the housing market, so it's unclear how one can conclude that different regulations would have caused the Fed to do so.
> One nonetheless must point out what these people ought to have done, whether they really could have done it or not.
That depends on what said "pointing out" accomplishes. If it fuels bad policy/giving further power to the people who failed, it's a bad idea.
> I would note that the rise Greenspanism/"market fundamentalism" itself, starting in the 1990's, certainly made it much more politically difficult to stand against Wall Street's further partying in the 2000's.
If you're going to argue that the President and Congress weren't going to do anything, then it's unclear who you think would have done something.
I will note that McCain tried to get Fannie and Freddie under significant regulation during Bush's first term. He got a little support from some Repubs, no support from the rest, and kicked in the teeth by all the Dems who are currently screaming for more regulation and about how Bush screwed things up.
>> Subprime mortgages were a creation of regulation and were overvalued as US regulatory policy.
> I would love see documentation of this...
One of the major pieces of relevant legislation was Community Reinvestment Act, although the regulations and regulator actions were what gave it teeth.
Others have posted extensively on this, with links.
There's also Fannie and Freddie, which paid a huge role in creating a market.
> The US military, is controlled by the state but can tell the EPA to * itself and often does.
The US military may have more leeway than the post office, but I wouldn't say that it gets away with much. It spends a lot of time in court and if it's sane, avoids a lot of things that might end it up in court.
More support for "the regulators failed" comes from Fannie Mae. They brought in some professionals because pols have figured out that it's a toxic association.
The professionals decided to accurately report the value of certain assets to investors, namely that said assets had lost a lot of value. The regulators objected....
> So I'd challenge the statement that the US did not fail in a typical fashion.
I'm not claiming that the US failed for a surprising reason. I'm saying that its failures are like what anything the IMF has tried to deal with before.
One might argue that the stimulus packages will cause the sorts of problems that the IMF claims to handle....
> Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.
The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.
Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC intervention is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.
Finally someone said it, and better than I ever could have.
Here in Russia a lot of people sighed freely some years ago when our debt to the IMF finally was repaid, early and in full. The organization has a very bad name here for advocating drastic reforms that led to social shock and, yes, many deaths. It might be more a fault of our own government, but still it feels better to be debt-free.
I enjoyed the article. I also enjoyed looking through their blog (which is mentioned at the bottom of the article pages). It seems like a good place to get an easy to understand analysis of the banking crisis news.
exactly right. And the system will be the same as before - nothing will have been done to address the heart of the problem - banks that are "too big to fail".
Anything that is too big to fail is just too big.
We have successfully broken-up companies that were too big before - AT&T comes to mind. Do you think we would have an open internet if one company controlled all access to long distance communication like AT&T did before 1984?
http://en.wikipedia.org/wiki/Bell_System_divestiture
Entities that are that big have big lobbies. Big lobbies give effective control of governing bodies (at least, in their limited scope); this is known as regulatory capture. AT&T was broken up by judge, not by Congress, so it is not a good counterexample.
I think the banking crisis was milder in Sweden because of the handling of the crisis in the beginning of the 1990s. Then, the shareholders of the Swedish banks were hurt to save the banks, so the banks knew they would not get _free_ money from the state in the next crisis (which makes the banks a bit of an exception in Sweden, but that is another discussion.)
After reading the article, it seems both more complex and simpler than that. Really good.
http://news.ycombinator.com/item?id=518776
Over time special interest groups work to reduce a society’s efficiency and GDP by enriching themselves -- in this case it's the financial industry.
Another common idea is regulatory capture:
http://en.wikipedia.org/wiki/Regulatory_capture
Regulatory capture is a term used to refer to situations in which a government 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.
The SEC and other government posts like the Secretary of Treasury are unduly influenced by the finance industry. In fact, as the article points out, those government positions are often filled with alumni from the finance industry.