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This is What Regulatory Capture Looks Like

During the stress tests, an administration official told me that some of the most aggressive pushback was coming from, of all people, career regulators. The banks are fine, they said. They're capitalized. This is unnecessary. That's not necessarily surprising: If the career regulators were to admit a systemic problem, they'd be admitting their own failure. Even so, this was apparently a real problem given that the actual work of the stress tests had to be carried out by regulators who were churlish over their very existence.

Today, Steve Pearlstein gives these intransigent bureaucrats a name and a face: John Dugan, the comptroller of the currency, who thinks big banks are getting a bad rap these days, and has the gall to argue that they should be celebrated because so few of them have failed (so few of them have failed, of course, because the government has funneled hundreds of billions of dollars into keeping them alive). This is what regulatory capture looks like.

For a bit more on how it works, however, I'd suggest two sources. Daniel Hardy, an IMF economist, wrote a paper called "Regulatory Capture in Banking," which has a good overview of the standard literature in the introduction (the rest of the paper doesn't hold up as well). More interesting is the contribution of William Buiter, a former member of the European Central Bank, who published a long analysis of the "Lessons from the North Atlantic Financial Crisis" (pdf, of course), which has a nice discussion of regulatory capture as a function of small-group dynamics beginning on page 36.

By Ezra Klein  |  May 27, 2009; 2:00 PM ET
Categories:  Financial Crisis , Government  
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ITYM "Willem Buiter"

Posted by: albamus | May 27, 2009 2:29 PM | Report abuse

Excellent tips Ezra. Kudos to the Post for hiring you--one of the best decisions they've made recently.

Posted by: Castorp1 | May 27, 2009 4:27 PM | Report abuse

I find the indirect praise of Sheila Bair by Ezra amusing. Bair through her own incompetence was one of the main accelerants of the financial crisis.

See John Bronte for the explanation.

Ezra's understanding of these issues is incredibly superficial.

Posted by: kovachs | May 27, 2009 4:49 PM | Report abuse

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