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.Pro-Market
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