Planet Money is back at it with another great podcast highlighting how many of the recent "major issues" the world is facing -- from the financial crisis to the spewing oil in the gulf are being blamed on regulatory failures, usually in the form of a lack of oversight. The response by politicians, of course, is to look at the hammer they have, and see "more regulations" as the nail to hit. And so, we're getting all sorts of new regulations. But will they do any good? The podcast is pretty skeptical
. If you're familiar with the concept of regulatory capture (and you should be) there's little in the podcast that's new. But it is a nice, succinct explanation of the concept -- with a great story from a former gov't bank regulator who worked for the agency that was regulating Savings & Loans before the big S&L crisis a couple decades ago. The response from the government was to create new regulations that "wiped out" this agency. The guy went out to watch the speech, and then went back to his building... and saw that the old name had been taken down, and in its place was the new name of the "new" regulatory agency created by this new regulation: the Office of Thrift Supervision, and his "new" job at the same desk doing the same thing as before. And, of course, the Office of Thrift Supervision was the regulatory agency behind AIG and many of the problems that resulted in the financial mess we're still digging our way out of today.
The problem -- then, as is happening now -- is that any time you set up a regulatory agency, even if it has the best of intentions, those who are regulated will either find loopholes or get enough influence over the agency to create loopholes (in the extreme case discussed in the podcast, this even includes "sexual relations" and drug use between regulators and those they regulate). Regulatory capture is what happens when you have regulations that are supposed to "protect" people from an industry -- but where that industry gets more and more say in how that agency regulates and how those rules are interpreted. The end result is often worse than no regulation at all.