One of the world’s inevitabilities is regulatory capture: when regulators who are supposed to regulate an industry end up serving the industry’s interests, rather than the public’s. Given this immutable truth, outrage over the recent legislation amending the 2010 Dodd-Frank financial regulations strike me as somewhat beside the point. Dodd-Frank got taken hostage a long time ago.
A small group of moderate Democrats broke ranks to support the bill and enable passage in the Senate — and were met with denunciations by the leaders of the Dem progressive wing. “Republicans AND Democrats are gutting the rules on Wall Street,” Elizabeth Warren fumed. “The bank lobbyists have been hitting Capitol Hill hard…” Bernie also jumped in: “At a time when banks have never been more profitable, Congress voted yesterday to give them another massive gift in the form of deregulation. Our job is to break up the largest financial institutions in the country, not reward their greed and recklessness.”
I give Warren and Sanders credit for consistently calling out finance’s corruptive money-driven influence in politics. Yet by making the recent rollback a rallying point, the two most prominent critics of our rigged system expose themselves to the charge that they don’t care about the fate of smaller community and regional banks, the institutions that the rollback was most designed to help. And more fundamentally, attacking the recent bill inadvertently promotes a superficial narrative that shifts the blame to the current era of the Trump crisis, and distracts from consideration of systemic problems that cut across party lines and go back to 2008-09.
Scott Pruitt and the entire Trump administration are so blatantly captured by industry that they give the concept of regulatory capture a bad name. Certainly George Stigler, the University of Chicago economist who coined the term, could not have imagined the current reality-TV version of capture by nationalist-populist buffoons. But he might have appreciated the more sustained, multi-front campaign of the financial industry to either get rid of Dodd-Frank or to turn it to its own advantage.
The undoing of Dodd-Frank didn’t start with the Trump inauguration; it started from the very first moments in 2008 when new financial regulations first were put on the congressional agenda. From the outset, the industry pursued a scorched earth policy to block and revise the regulations, with barely a period of remorse following the crash and the Wall Street Bailouts. Dodd-Frank passed in mid-2011. In both 2010 and 2011, the financial industry spent over $200 million on lobbying to water down the regulations, the NYT reported in late 2012. Other observers believed that the influence campaign involved much more money. “The story of this evisceration is largely one of money—the tens of billions of dollars in profits that banks and other financial institutions stand to lose if Dodd-Frank is implemented, and the astonishing sums they’re spending to squash it,” investigative reporter Gary Rivlin wrote in mid-2011. “The industry paid lobbyists $1.3 billion in 2009 and through the first three months of 2010, according to the Center for Public Integrity, which added up the spending by the 850 businesses and trade groups fighting financial reform. Many of these same businesses are now spending as much money, if not more, to lobby for curbs on the new law.”
The lobbying, litigation and contributions continued to intensify. As journalist Matt Taibbi wrote in 2012: “From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while – but they can no longer make sure it stays passed. You win the modern financial-regulation game by filing the most motions, attending the most hearings, giving the most money to the most politicians and, above all, by keeping at it, day after day, year after fiscal year, until stealing is legal again.”
In late 2014, Wall Street won a legislative change in regulations governing derivative trading (the “swaps pushout rule”), with the NYT declaring “six years after the financial crisis, large banks have found a way to kill off regulations that were part of the Dodd-Frank Act, the sweeping legislation that Congress passed in 2010 to overhaul the financial system.” Bloomberg Intelligence put it more soberly: “Dodd-Frank isn’t bulletproof but continues to have thick armor.” By mid-2015, financial industry political influence expenditures, since the passage of the original bill, reached $3.25 billion.
Not surprisingly, the spending and lobbying was intense leading up to the recent Dodd-Frank rollback. An analysis of political contributions from the 26 major banks standing to benefit the most from the bill shows that senators who voted to support the bill received median contributions that were 53% more than those who voted against the bill. The same group of banks spent $19 million on lobbying in 2017.
While the naked corruption of dollars for votes can change regulatory laws, the deeper influence of regulatory capture takes place in the agencies and in the regulations they issue. With Dodd-Frank, the starting point of capture was the utterly insane complexity of the regulations. As of last summer, 26,430 pages of Dodd-Frank rules had been published in the Federal Register. That is more than 28 million words. And at that point, only 70 percent of the rule making requirements had been finalized. . The more complex a law is, the more regulators are needed, and the more lobbyists and lawyers are deployed. Complexity is the breeding ground of regulatory capture.
One bizarre twist of regulatory capture is that once regulators have been captured, the pro-industry regulations become preferable to a regime with no regulations, often because the regulations can be twisted to limit competition. After Trump won, the CEOs of both Goldman Sachs and JP Morgan came out against a repeal of Dodd Frank. As the Economist noted: “..the pressure to rip up Dodd-Frank has eased, not least because the big banks have built vast compliance operations which they believe give them an edge over smaller rivals.
As University of Chicago economist Luigi Zingles noted in 2012: “Each page of regulation probably provides a year’s worth of employment for several lobbyists and a couple of lawyers and economists.” He continues: “This gigantic waste is never properly factored into our economic analysis.” This reality has led Zingales, hardly a socialist, to support a return to the New Deal Glass-Stegall Law, separating the activities of commercial banks and investment banks. “…if regulation is too complex, people have no way to understand it and thus cannot participate properly in democracy,” he writes. “Simplifying regulation, therefore, is essential to building a capitalism for the people.”
Finance wrecked the world economy in 2008, and Dodd-Frank was the primary US political response. If Dodd-Frank couldn’t resist corruption, what can? What happened to Dodd Frank in Washington last week is not all just part of the Trump nightmare. It’s part of a longer-range, more systemic issue that has persisted across Democratic and Republican administrations. Striving for a better way to regulate finance, a way that has some hope of resisting the capacity of a rich and powerful interest group to capture, is a long run issue that needs fixing.
Regulatory capture itself is a long run issue that needs fixing. The next testing ground of our political capacity to take on powerful economic interests may well be high tech. Much of the reformist energy previously focused on Wall Street seems to have shifted to Silicon Valley. Calls for antitrust enforcement, perhaps a breakup of Facebook, would seem to depend a lot on the Federal Trade Commission. To what extent has the FTC been captured? To what extent has Tech captured Congress — with contributions, with lobbying, and with the implicit threat posed to the political system by the combined power of data and media control.
So if there is a Dodd-Frank for Facebook, Google, Amazon and Apple, I wonder if it will take a long as 10 years for the Act to be rolled back?