Capturing politicians, regulators, and public outrage
The life of the Office of Thrift Supervision comes to an end now that the financial regulation bill is law. The end of the life of the Office is overdue, but its life illustrates the problem we face as we appoint regulators to protect us from financial institutions, oil companies, pharmaceutical companies, and all other interest groups. George Stigler, a University of Chicago economist and Nobel Prize winner called it the “capture” problem. We, the general public of individual investors and consumers, hope that regulators would fight for us against the interest groups of bankers, lawyers, union members and employers. But regulators are more likely to be captured by interest groups, treating interest groups as customers and constituents to be served rather than as potential regulation-breakers who should be policed. “Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion,” said James E. Gilleran in 2004, while serving as the director of the Office. John M. Reich, who directed the Office in 2007, canceled a scheduled lunch so he might have lunch with Kerry K. Killinger, the chief executive of Washington Mutual. “He’s my largest constituent,” Mr. Reich wrote.
Politicians have the power to direct regulators to act in the public interest, yet they feel compelled to let themselves be captured by interest groups which provide contributions to campaigns which keep politicians in office. Regulators do not need campaign contributions but they let themselves by captured in return for favors while in office and lucrative industry jobs once they leave office. The general public has ultimate power over politicians and regulators since it votes politicians into office or boots them out. Yet the general public rarely exercises its power when placated by economic booms and rising financial markets which reduce its vigilance. Yet recessions and collapsed financial markets outrage the general public, increasing its vigilance and its clamor for regulatory protection from interest groups.
Outrage shifts power to the public as politicians can garner more votes from an enraged public than they can buy with contribution from interest groups. President Obama and the Democrats harnessed public outrage to propel the new financial regulation law. While the law includes many parts, Obama aimed the spotlight at the consumer protection agency in a speech before signing the bill into law. He highlighted practices which enraged the public and would now be outlawed, including hidden fees in mortgages and tricky financial disclosures. “All told, these reforms represent the strongest consumer financial protections in history,” Obama said. “And these protections will be enforced by a new consumer watchdog with just one job: looking out for people — not big banks, not lenders, not investment houses.” Republicans have argued that substantial portions of the new law, especially the new consumer protection agency, have little to do with the financial crisis. That argument is true, but it misses the point. The financial crisis whipped public outrage and Obama and the Democrats harnessed the outrage rather than waste it.
Public outrage will subside as the economy and financial market recover, bankers and other interest groups will regain their power to capture politicians and regulators, and so it will be till public outrage swells again in the next crisis.