Regulatory capture occurs “when a regulator gets too cozy with the company that he’s supposed to be monitoring. He’s like a watchdog who licks the face of an intruder and plays catch with the intruder instead of barking at him”. The Federal Reserve Bank of New York “Is responsible for regulating the banks on Wall Street, which is to say some of the biggest banks in the world. It’s supposed to monitor what they do by ensuring that they don’t break the rules or take risks that could bring down the financial system”. However, they failed to do this, “even the people at the Fed admitted they should have done a better job, one of the things they did is they commissioned a secret report, a secret report that you and I were never meant to see” so as to prevent the occurrence of another financial meltdown in the future.
Obstacles and Reforms
Several factors have led to the occurrence of the regulatory capture one of which is “that once clients were wealthy enough, certain consumer laws didn’t apply to them.” Additionally, the regulatory capture is supposed to make sure that banks do not take risks that can bring down the financial economy. However, if such instances are unavoidable, the bank is supposed to notify the Fed about such a risky venture, which might or might not grant permission for the business deal by obtaining a “no objection.”
Correlatively, we tend to form interactive relationships because it is in our nature to try to co-exist peacefully. Similarly, “examiners feel that the easiest way to get information is by cultivating a friendly relationship, being non-confrontational.” Over time this results in regulatory capture because it becomes a habit and boundaries are overstepped. To change this, the Feds ought to “open up and encourage people to speak up more. The need to encourage dissent rather than stifle it.”
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