Regularoty Capture 101 at Goldman

Terrific piece on the scandal at Goldman Sachs, and on public choice theory:  people don’t stop being people when they become bureaucrats.

As the Nobel-winner put it 50 years ago:  “The economic role of the state has managed to hold the attention of scholars for over two centuries without arousing their curiosity.”

From today’s WSJ in Regulatory Capture 101:

The news is being treated as shocking by journalists who claim to be hard-headed students of financial markets. One especially impressionable columnist calls it “a jaw-dropping story about Wall Street regulation.” The real scandal here is the excessive faith that liberal journalists and politicians continue to put in financial regulation. The media pack is discovering regulatory capture—a mere 43 years after George Stigler published his landmark paper on the concept.

On the recordings, regulators can be heard doing what regulators do—revealing the limits of their knowledge and demonstrating their reluctance to challenge the firms they regulate.

The “idealistic view” is that enlightened regulators, with complete knowledge and perfect wisdom, and above corruption – like angels – will prevent the next scandal if only there were more pages of laws:

Enter George Stigler, who published his famous essay “The Theory of Economic Regulation” in the spring 1971 issue of the Bell Journal of Economics and Management Science. The University of Chicago economist reported empirical data from various markets and concluded that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”

Stigler knew he was fighting an uphill battle trying to persuade his fellow academics. “The idealistic view of public regulation is deeply imbedded in professional economic thought,” he wrote. But thanks to Stigler, who would go on to win a Nobel prize, many economists have studied the operation and effects of regulation and found similar results…

Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can’t be gamed by the biggest firms and their captive bureaucrats.


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One Response to Regularoty Capture 101 at Goldman

  1. Paul Marks says:

    At first regulations may benefit established players – but eventually (as the regulations get more and more extreme) even the established players lose by them. This has been shown in many industries – and financial services will go the same way.

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