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How Americans Are Financing Their Own Worst Fear

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1 comment to How Americans Are Financing Their Own Worst Fear

  • rich

    SEC’s Andrew Bowden Regulatory Capture Scandal Hits the Major Leagues with Los Angeles Times Column

    It’s also great to see Hiltzik give Bill Black’s follow-up at New Economic Perspectives a link and a quote as well; both NC and NEP in essence put the “political” back into “political economy,” but by taking a systemic, rather than a partisan, perspective, and yet still (as with the Andrew Bowden) using story hooks. It may be too much to call these blogs — as well as many of the blogs on NC’s and NEP’s blogrolls — a school of thought, but certainly their general approach is different from “pure” economics blogs, but with no loss in rigor. So one can only hope that Hiltzik continues to keep this — dare I say — ecosystem of blogs on his reading list.

    Third, Hiltzik frames the Bowden affair in terms of Janet Yellen’s remarks on regulatory capture, as we saw above. Yellen’s picture is in the header of the article, after all, and:

    Yellen said the Fed is constantly on its guard against regulatory capture. She also attributed the financial crisis to breakdowns in regulation, some of which plainly fell into the category of “capture,” including “the expansion of a largely unregulated ‘shadow banking system’ rivaling the traditional banking sector in size and the failure of “checks and balances that were widely expected to prevent excessive risk-taking by large financial firms — regulatory oversight and market discipline.”

    So it will be interesting to find out if the SEC’s Mary Jo White agrees, or disagrees, with Janet Yellen on regulatory capture in the financial industry. One obvious way for White to signal her agreement would be for her to ask for Bowden’s resignation, as Black suggests.
    Fourth and finally, there’s an aspect to the Bowden scandal that Hiltzik does not address, and that I would like to reinforce.

    The form of capture we’re looking at here goes far beyond — and dangerously beyond — the Third World-ish story hook of a guy trying to get his son on the payroll (“That’s a deal”). What Yves colorfully calls “Kool-Aid,” Willem Buiter, in the classic paper (PDF) he delivered to the [lemon sucking-faced] Fed conference at Jackson Hole in 2008, called “cognitive regulatory capture”

    This socialisation into a partial and often highly distorted perception of reality is unhealthy and dangerous. It can be called cognitive regulatory capture (or cognitive state capture), because it is not achieved by special interests buying, blackmailing or bribing their way towards control of the legislature, the executive, the legislature or some important regulator or agency, like the Fed, but instead through those in charge of the relevant state entity internalising, as if by osmosis, the objectives, interests and perception of reality of the vested interest they are meant to regulate and supervise in the public interest.

    Things You Can Do

    Readers, here are a few things you can do, right now, to keep this story in the public eye.

    Second, you can write to the Dean of Stanford Law School, expressing your concern over events related to the conference that Stanford hosted on March 5, “Emerging Regulatory Issues in Private Equity, Venture Capital, & Capital Formation in Silicon Valley,” which you read about in the Los Angeles Times.

    You might mention that the video recording of the “Regulatory Issues” conference shows that the moderator, Joseph Grundfest, did not disclose his industry ties, and ask — and I’m genuinely asking here — whether his failure to disclose conforms to Stanford’s “Staff Policy on Conflict of Commitment and Interest.” (See especially 2(f) on “business relationships”; Grundfest is on private equity giant KKR’s board, and KKR has “a business relationship with the University,” having invested in Highwire Press, an “auxiliary unit of Stanford University libraries.”)

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