From The Fields

The Insidious Grip of Regulatory Capture on Our Economy

FromTheFields Wednesday May 22, 2024

Libertarians have long made the argument that government regulation of business is worse than useless. It is quite often counterproductive. This is because of the prevalence of something called regulatory capture.

Most people pay little attention to who gets appointed to the myriad Federal three letter agencies that do most of the regulation of business at the federal level. One group of people pays a lot of attention to that phenomenon. That would be the people who own and manage the businesses being regulated. They are very interested in making sure that the people running regulatory agencies are one of their own. It's called regulatory capture. It's why K Street is lined with the offices of very expensive business lobbyists..It's why the Washington D.C. metro area leads the United States in per capita income. Those lobbyists are largely successful at making sure that Federal regulatory agencies are almost always staffed at all levels of management by people who are very friendly to the industries they regulate. Usually said regulators actually are former employees of the industries they regulate and go back to work for those self-same industries once their stint in Washington is over.

Oh, and while these corporate cronies are in Washington working for a fraction of what they did and will in the future make working back in the industries they regulate, they do a little moonlighting. It's called insider trading. They know before the investing public does what new regulations are coming down the pike and how they will affect the values of the companies they regulate. And they profitably trade the stocks of those companies accordingly.

Here is an excellent example. Robert Kaplan was a twenty year veteran of Wall Street vampire squid Goldman Sachs. He was appointed President of the Federal Reserve's Dallas branch, presumably at less pay than he was making at Goldman. No worries though. He picked up a little extra pocket money by making rather large trades in stocks like Delta Air Lines, Chevron and Apple the exact week in 2020 that then President Trump was shutting down the economy. But we know he was not engaging in insider trading or anything nefarious like that. The Fed's own Inspector General said so. They said it was only the appearance of a conflict of interest. Kaplan did resign though.

Well guess what? He's back. At Goldman Sachs, no less. As a Vice Chairman where he will give strategic advice to the Wall Street giant's clients globally, working closely with its teams across global banking and markets, and asset and wealth management, the bank said in a statement.

Well good for him. And good for the Federal Reserve keeping us all safe from the failure of banks "too big to fail" .

And who are a lot of those K Street lobbyists that make this turnstile turn? Why, of course, Congressmen looking for a pay raise doing a cushy retirement gig by trading on their contacts on the hill. That's how regulation actually works. I'm Richard Fields with this weeks Report From the Fields. See you again next week.