Thursday, August 4, 2016

Bill Black — Regulatory Capture is Not “Inevitable”

Federal regulators were captured by their ideological biases, created by economists and writers who constructed a fantasy world in which top bankers would never engage in fraud or rig the system against the customer. The regulator’s proper function under this fantasy was to get out of the CEO’s way and let him work his genius. The CEOs knew how easy it was to “game” any “accounting residual” such as capital or income—and they gamed them massively in the savings and loan (S&L) debacle, the Enron-era frauds, and the most recent crisis in order to optimize their looting. People in the grips of ideological nostrums are most likely to implicitly assume out of existence such an “obvious” point as the bank CEO’s ability and perverse incentive to game reported capital and income. “Capture” has become a self-fulfilling prophecy of economists who turn their students into sure-to-fail regulators crippled by their ideological economic fantasies.
But capture is not inevitable. The reason that the S&L debacle was contained and did not produce a financial crisis is that the ideological economist Richard Pratt, who deregulated and desupervised the industry, was replaced by a non-economist, Edwin Gray, who actually listened to the examiners in the field and to the findings in their “autopsies,” which demonstrated that the problem was looting led by the CEOs….
Regulatory Capture is Not “Inevitable”
William K. Black | Associate Professor of Economics and Law, UMKC


Matt Franko said...

Black says here:

"replacing them with a simple requirement for more bank capital—an equity-to-asset ratio of perhaps 15%.”

The editorial specifically invoked George Stigler as the authority for this claimed “inevitability.” It cited no source for its facially absurd claim that reported capital levels cannot be “gamed.”

So seems he is talking about capital so far, then he says:

"George Akerlof and Paul Romer emphasized this absurdity in their 1993 article on looting—and explained why it was strange that they had to emphasize such an “obvious” point.

“We begin with a point about accounting rules that is so obvious that it would not be worth stating had it not been so widely neglected in discussion of the crisis in the savings and loan industry. If net worth is inflated by … accounting … incentives for looting will be created. *** [E]ach additional dollar of artificial net worth translates into an additional dollar of net worth than can be extracted from the thrift”

So he is now talking about net worth... net worth is not the same as regulatory capital...

He is conflating 'net worth' with reg capital... here:

"Capital in this sense is related to, but different from, the accounting concept of shareholders' equity."

He is thinking that sharholders equity ratios and reg capital are the same thing...

Lawyers.... you start to use same words in different contexts and they can lose it pretty quickly....

Matt Franko said...

and another thing is that Black just will never understand the MMT phrase "its about price not quantity..." he just doesnt get this looks like he never will....