Regulatory Capture

Salmon and Lowrey on the devastating findings of a ProPublica report on the deference shown by the New York Fed to the firms it’s supposed to be regulating. The former’s depressing conclusion:

So we have a situation where bank examiners have every bureaucratic incentive to do nothing, and they also have a professional incentive to do nothing, lest the banks they’re examining start becoming more financially precarious. And then, as Dan says, there’s a third structural issue at play — which is that senior bankers have much more access to senior Fed officials than junior Fed officials do. If Segarra and her team kicked up a fuss at Goldman, Lloyd Blankfein could pick up the phone at any time and complain to the president of the NY Fed. The president of the NY Fed knows and likes and respects the CEO of Goldman Sachs; he probably never even met a junior staffer like Segarra. (None of this is helped by the fact that the NY Fed is a private institution, whose shareholders include the likes of Goldman Sachs.)

So while Bernstein’s story is an eye-opening look into how regulatory capture works in practice, the people complaining about the lack of a smoking gun have missed the point. The scandal is precisely that ’twas ever thus: that the Fed was captured, is captured, and probably always will be captured by the banks it regulates. If it refuses to admit that there’s even a problem, then there’s no way that the situation is ever going to improve.