Regulatory capture: for example the Federal Reserve

[Ser Scot A Ellison]

This is a fascinating episode of "This American Life" with secret recordings of internal meetings at the New York Fed and between the Fed and Goldman Sachs. It points out the frequent cross employment between the Fed and investment banks:

http://m.thisamericanlife.org/radio-archives/episode/536/the-secret-recordings-of-carmen-segarra

It's very interesting. Discuss.

[The Notorious]

Do you think elected politicians and government employees should be barred from private sector employment after leaving government services, Scot?

[Ser Scot A Ellison]

Lev,

That's the really hard question and I am quite interested to get your take. It seems, having listened to this, the "Regulatory Capture" comes from the regulators desire to not piss off the bank... because they want jobs there when they leave the Fed.

The only way I can see to legally prevent the cross employment is some monetary damage agreement to prevent Fed employees from ever taking employment with a bank they have regulated. Even then they could end up at a similar but different institution. Or just pay the damages.

[The Notorious]

Scot,

Besides the carrot and stick approach, there really isn't much else to resolve this issue. You can use a bigger stick: banning of employment for entire sector/industry within a certain amount of time (says 3 years), and a heavier fine for violation. You can also offer more carrot by offering higher salaries, but that's probably least effective given the amount of whines about overpaid bureaucrats and the huge pay discrepancies offer by some firms.

[Commodore]

another plug for bitcoin, it is regulated by something that cannot be captured

namely, math and code

[The Notorious]

Did you bought any of the bitcoin auctioned off from the seizure from the peddler of drugs and child porn operation known as Silk Road, commodore?

[NestorMakhnosLovechild]

another plug for bitcoin, it is regulated by something that cannot be captured

namely, math and code

Kind of like how computers, which are regulated by "math and code" cannot ever be captured by... wait... wait a second.

[NestorMakhnosLovechild]

This is a fascinating episode of "This American Life" with secret recordings of internal meetings at the New York Fed and between the Fed and Goldman Sachs. It points out the frequent cross employment between the Fed and investment banks:

http://m.thisamericanlife.org/radio-archives/episode/536/the-secret-recordings-of-carmen-segarra

It's very interesting. Discuss.

Scott,

Having actually listened to the episode when it first came out, I think this is a questionable case of "regulatory capture." In fact, I think Glass is guilty of poorly defining regulatory capture at the start of the episode. It's not just that a regulator becomes too cozy with the organization that they're supposed to be regulating. It's when a a regulatory agency ends up advancing the interests of one of the companies/groups it's supposed to be regulating to the exclusion of other companies/groups in the field of regulation.

The question being raised by the Federal Reserve office in this case is whether the transaction that Sachs did to basically help out a foreign bank for no obvious benefit to themselves or their shareholders is the type of deal that the Federal Reserve should be allowing banks to do. Ultimately, by the end of the episode we're no clearer to a resolution of this issue, but it's not clear to me that Sachs is 'capturing' the regulation here to the detriment of other banks in the industry. It does seem clear from the episode that the Federal Reserve regulators stationed inside Goldman Sachs are compromised in their ability to regulate it.

[Commodore]

Kind of like how computers, which are regulated by "math and code" cannot ever be captured by... wait... wait a second.

Think of it this way, you could modify BitTorrent code, but no one else on the BitTorrent network would be running your version of the protocol.

So BitTorrent is uncapturable (and very powerful institutions have tried).

[Larry of the Lawn]

From what I understand the honey badger is also un-capture-able. Doesn't mean I want to use it as a currency.

[Ser Scot A Ellison]

Guys,

There is a bitcoin thread.

Nestor,

Well, TAL isn't made up of "legal" or "regulatory" professionals. Whether this cosntitutes the exact definition of "Regulatory Capture" is less interesting, to me, than whether or not the Fed's regulatory team in a given bank are capable of properly supervising the banks they are charged with supervising.

[maarsen]

Here in Canada, if you work for the government, especially federally, I think there is a cooling off period during which you are not allowed to work in any industry that was directly connected to your government employment. Of course there are ways around this. Let's say you were high up in the Finance Ministry. Rather than working for a bank afterwards, you would go to a law firm that had banks for clients.

[Commodore]

Well, TAL isn't made up of "legal" or "regulatory" professionals. Whether this cosntitutes the exact definition of "Regulatory Capture" is less interesting, to me, than whether or not the Fed's regulatory team in a given bank are capable of properly supervising the banks they are charged with supervising.

Of course not. All centralized institutions of power eventually become captured and corrupted.