Regulatory Capture Underground and At Sea

By James Kwak

First there was the financial crisis. Then there was the West Virginia mine explosion. Now we have the BP oil leak. In each case, we were treated to news stories about the cozy relationships between the industry and the regulators who were supposed to be regulating it. (Here’s the latest New York Times story on how the Minerals Management Service was captured by industry — a problem that has existed for a long time, but that the Obama administration apparently did little to fix.)

Occasionally people say that the story we tell in 13 Bankers is really the same in every industry. That would not surprise me. I do think that the financial sector is unusual for a couple of reasons. One is that the interconnections between the major financial institutions make each one too big to fail in a way that, say, Enron was not. Another is that modern finance is so complex that it makes it easier for industry lobbyists to run roughshod over congressional opponents. But the problem of regulatory capture is obviously not restricted to finance, and it is a problem that we are seeing all over.

I’ve been meaning to write about this, but I haven’t had and won’t have the time. Arianna Huffington wrote an article on the parallels between the financial crisis and the West Virginia mine disaster. Lawrence Baxter has two recent posts (on his new blog) on regulatory capture and the role of regulation. Obviously this problem is not easily solved, especially in the wake of the Citizens United decision, which gave corporations even more influence over our political life. But hopefully the BP oil leak will produce a wave of anger — and a demand for answers — similar to what the financial crisis gave rise to.

37 thoughts on “Regulatory Capture Underground and At Sea

  1. Well, I find myself once again commending Thomas Frank’s The Wrecking Crew, in which he describes how the same sort of regulatory capture infected FDA, Dept of Labor, FCC, Dept of Agriculture, etc.

    The task of enforcing government mandates is again and again turned over to people who fundamentally believe that government is the problem, and is incapable of performing the task set out for it.

    The strategy is now in its final phase; when the anti-government forces held power, they stocked agencies with like-minded people and forced out career bureaucrats who understood how to regulate (or they quit in disgust). Now that they are out of power, they point gleefully to how dysfunctional the system is.

    Enjoy your Memorial Day.

  2. “If it moves tax it, if it moves a lot regulate it, if it stops moving subsidise it” Ronald Reagan

  3. Regulatory capture happens because politicians are bought. There will always be some bribery, but we should try to keep it in check. To do so it can be helpful to first consider how electoral processes can be organized to enhance bribery.

    First you establish single member district pluralities, i.e. elections in which voters have one vote for the candidate of their choice, and the winner is the candidate who receives a simple plurality – for example 34% in a 3-way race. While parties may play a role in such a system, ultimately the individual candidate wins or loses. She can win without a simple majority and however she wins, she wins a big, personal, perhaps dodgy victory.

    Then deny sufficient public financing for candidates and water down the regulations governing private campaign contributions. Argue for example that government should stay out of financing elections.

    Finally make it hard for eligible voters to actually exercise their right to vote, for example by intimidating them, but the tactics can be pathetically mundane. Have them vote on a weekday, have them register in an obscure office that is far from other municipal offices, and make sure that they don’t know what the ballot looks like in advance or how to mark it.

    Presto you’ve got optimal condidions for bribery which leads to regulatory capture, which leads to apocalyptic oil spills, among other things. This is of course the electoral system in the US.

    The democratic solution is a proportional electoral mechanism with a constitutional role for political parties that includes a provision for appropriate funding. This places the parties in the spotlight, not the attractive candidate who despite virtue is cash-poor.

  4. ‘One is that the interconnections between the major financial institutions make each one too big to fail in a way that, say, Enron was not. Another is that modern finance is so complex that it makes it easier for industry lobbyists to run roughshod over congressional opponents.’

    Maybe there are so many interconnections because it is just one system consisting out of several “separate organizations” competing with each in order to remain in shape, keep fit. And maybe it is so complex because it makes it easier for industry lobbyists to run roughshod over congressional opponents.

    “The money power preys on the nation in times of peace, and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes.”

    – Abraham Lincoln

  5. Several ideas run through most of Drucker’s writings:

    * Decentralization and simplification.

    * A profound skepticism of macroeconomic theory.

    Drucker contended that economists of all schools fail to explain significant aspects of modern economies.

  6. Criticism on Peter Drucker;

    And while he was known for his prescience, he wasn’t always correct in his forecasts. He predicted, for instance, that the nation’s financial center would shift from New York to Washington.

  7. Cozy with regulators or not, disaster recovery plans for financial systems are too complex for any outside agency to evaluate for effectiveness. Having worked on disaster recovery planning for a financial institution, I know that the current architectures will not support a non-disastrous recovery. To be specific on any given plan would take a monumental effort for those familiar with what is involved, and would supply few answers as to how to mitigate the problems. That being said, I am pretty sure all the financial institutions are compliant with fed-reg, not because of cozy relationships, but because of the unrealistic expectation that regulations can be written that can insure recoverable systems. For the TBTFs it is most likely cost prohibitive to after-the-fact architect recoverable systems. Pray that none of the TBTFs lose their data centers.

  8. Capture is built-in to the regulatory models of many industries, often by law. So the Ag Department for example has a dual mission with built-in conflicts of interest, promote agriculture, and among other things, see that we’re not made sick from tainted beef or GMOs. Then you have the whole problem of who is competent to regulate. Well, most often the private sector’s expertise far outstrips that of the government, so naturally those experts find their way into the regulator, as consultants, tech staff and administration. You’ve recognized the problem is intractactble, thus the need for bright-line, nondiscretionary regulations.

  9. “Regulatory capture” is the fantasy term Simon Johnson has created so as to speak no evil of the political and lobbyist vomit that petrify him so. Convictions are commodities to these corrupt little maggots, not a single one of them holds a viewpoint that wasn’t first purchased with campaign contributions. But Johnson just can’t bear the thought that these are not honorable men, just men who have brought to the light of a particular zeitgeist. That naivete alone ought to be enough to convince anyone to approach 13 Steps with a healthy skepticism whatever truth it may have to offer.

    As to your solution, it has all the feasibility of one’s preventing their eyes from blinking. You don’t solve the corruption problem with structural changes to the very same system that first require the consent of the very lice that are plundering it. This talk of single member districts has all the reality of time travel short of the mass demonstrations and strikes that would permit our starting all over again from scratch. Further, no new structures worth a tinkers damn could be erected without simultaneously seeing to the arrest and public trial of these vermin who have stolen our democracy. Justice needs to accompany change, nothing less.

  10. James left out the Johnson and Johnson children’s Tylenol recall.

    These four regulatory failures actually give me hope, because they have forced us to take note and pay attention to what LACK of regulation brings. We can discuss all day about how it came into being, and there are multiple correct answers. It didn’t arise, fully blown, however; it has been a process over 30+ years, as the growth of lobbying has brought us to the point where lobbyists actually, literally, write the legislation that is supposed to safeguard the public; the revolving door between business & Washington is part of it, as is the loss of career bureaucrats who had no political ax to grind, and knew their area cold.
    My hope may be misplaced, but it’s all I’ve got left.

  11. Very good, Engineer :-)

    Blow up a person’s house, snap a picture of their face in that split second of horror and anger and fear

    Post that picture on social network sites as PROOF that that person is an “animal” – the “religious” schtick to back up the other schtick of “dysfunctional government”…

    So things will continue to blow up, food will be bacteria laden, medicine will not have enough “active” compounds to be effective, insurance won’t cover anything that they supposedly exist to cover, labor is DEBT, not profit, and on and on…

    Well, the laws of physics are not on the side of the “elite minority” – they don’t have the necessary mass – even though they designed themselves to be a black hole sucking everything in :-)

    Virtual is no match for real in the final analysis.

  12. Assumtions runneth over here:

    1. There are no honest, ethical people out there who operate from character and a desire to “promote the general welfare” of the Whole; which means
    2. We need to find a way to regulate, and enforce those regulations, and make sure those regulations don’t have loopholes, ways to sidestep, etc. And…and…and, oh, yeah, better add that, too, and…

    Bmeisen: “There will always be some bribery.”

    We have been so conditioned, so brainwashed into believing that simply everyone is on the take, everyone is a liar, everyone is selfish, greedy, self-serving, short-sighted, and corrupt…that, well, the best we can do is try and monitor monitor monitor regulate regulate regulate enforce enforce enforce prosecute prosecute prosecute.

    My own personal experience: I have run across AMAZING individuals in this lifetime who wouldn’t think of screwing someone else over in order to become The Big Man On Top. Wouldn’t think of lying to the public. Wouldn’t think of putting him/herself at the front of the line if it meant others would be harmed.

    Wake up call, lovely people. We wouldn’t have to have all these regulations, all these rules, oversight hearings, investigations…if we decided to shake off the mind control daze we’ve been in that says, those currently at “The Helm” are the best people we can get for the job.

    Nada. Put my neighbor in charge of the SEC. Give a couple of months for a learning curve, and she’d “get” most of what she needed to get. And no question, if anyone so much as crossed the line one time: They’d be gone. Because she simply wouldn’t put up with it.

  13. Thanks, James. Regulatory capture, I believe has less to do with Congress, and much more to do about the generally quiet revolving doors between major industries and their regulators. There is constant and consistent migration between these theoretically competing interests, such that the competitors esseentially cease to exist. Of course, the supporting theory of having people move from, say a major pharmaceutical manufacturer to the FDA is that who could better understand what happens in the industry (and in theory, control it) than an insider who knows all of the drills. I am virtually certain that if the major regulators were examined closely, there would be an incredible amount of crossover between the “competing” interested parties. In fact, all things considered, it seems almost amazing to me that any real regulatory work is effective at all. I somehow believe that whatever gets publicized is carefully contrived so that it appears that the regulator is actually on the job.

    It is truly scary how much of this goes undetected, and this doesn’t take a lot, in fact very little, money to pull off, unlike effective lobbying, enhanced by effective campaign contributions. Even further, it is not generally within the Congressional purview, since these administrative agencies operate exclusively within the Executive Branch of government, and the only parts of them that rotate with regularity are the top (appointed) positions. The rest are high level, and, in many cases, career positions. This incestuousness is a pestilence on society (as substantially proven by Madoff and BP) and must, somehow, be stopped or at least controlled. I would suggest that the GAO and the IG become the best cops for that job, and perhaps with more diligence, and after these hard learned lessons, we may begin to see a bit more action like the one taken to break up the MMS.

  14. Allow me to rant, as only one who designs wells and wellfields AND has experience with disaster mitigation and response as it relates to infrastructure can:

    First, well drilling and wellfield design is a very complicated collection of tasks. Far more than inserting a straw into the ground to suck the goodies out. Drilling a well into a formation that has enough head pressure to flow at (what looks to me to be at least) 2000gpm requires a team effort between exploration geologists, downhole geophysical log techs, mud engineer, field geologist, casing/pipe engineer, development geologist/engineer team, and driller. Now this well also happens to be under 5000 feet of seawater…

    I have to deal with distribution and pumping engineers each and every day who don’t comprehend this, and often they are the project managers. I’m sure some readers will roll their eyes at the “but its so complicated” argument. This isn’t deliberately designed complexity like some CDO^3 – it really is that complicated. It is a mix of technical skill, education, trust, and intuition that usually results in product flowing from the ground and into the appropriate piping without anyone getting hurt or causing too much damage to the environment.

    Sealing this well after it blows out will take the same people (literally the same individuals) because they have the experience with THAT WELL. Too late for regulation, and there’s no guarantee that all the regulation in the world would have made any difference in this case except if drilling it had been forbidden by regulation and appropriately enforced. Having other people take over a failed well does not necessarily improve the situation.

    For example, I took over a collapsed well and it took over a year to determine the cause and whether to try again. Why so long? Because the critical evidence is BURIED. In the BP situation, not only is evidence buried, it also probably went down with the rig when it sank.

    Expect this well to flow until 2011, and there probably isn’t anything anyone can do about it despite all efforts to do something. Sealing the well will require mud engineers and mud manufactured for the task. I know of only two sources of this expertise: Haliburton and Schlumberger. Haliburton is there now, and I’m sure that Schlumberger (or anyone else) won’t get involved just because the risk of liability.


    FYI – drilling multiple wells in the same hole is normal, even optimal. Grouting off a difficult portion and re-drilling around it is also normal.

    If the failed well was poorly constructed (poor design, bad seal, grout failure, valve actuator failure, etc.), to mitigate future additional disasters the regulator should stop production from existing wells and construction of new ones until BP (and others) can verify that minimum standards have been met. This will not happen because 1) BP (etc.) will lose millions of dollars in lost production and delayed construction, and big oil is almost as “important” as megabanks; and 2) losing this oil source is a strategic national security risk.

    If the regulators had zealously done their job, this probably wouldn’t have happened. It might have anyway – its the risk of drilling wells.

    [steps off soapbox]

  15. Regulatory Capture was captured for the oil industry in Robert Engler’s 1985 book, “The Brotherhood of Oil.”

    And by Karl Marx: “government is the executive committee of the ruling class.”

  16. …if the hold was not filled with water. A gravel filter pack and fuel oil filling the pore space might work.

  17. Don’t forget cigarette smoking. Big Tobacco kept the government off-balance for a long long time.

  18. It appears that if this were tried and it didn’t work, then we would have an oil spill we can’t access. It is, unfortunately, much easier in these situations to make things worse than to make things better.

  19. “He predicted, for instance, that the nation’s financial center would shift from New York to Washington.”

    And in a very significant sense, it has. That’s what these guys (and this post) are writing about…

    simply because the center of physical activity has not moved, doesn’t mean the center of gravity remains in the same place.

  20. Their current “solutions” are not working and will not work. The above solution offers the chance of success in the short term. Accessing the wellhead, after they cut off the riser and attempt to attach a new pipe on the clean cut (which should have been tried FIRST, not six weeks into this mess), will not be necessary. Except possibly to seal the well after the relief wells are operating, but even then it shouldn’t matter.

    The relief wells, for example, they claim will be operational in a few weeks are overlooking the simple fact that it will take at least 6-8 months to construct the wells (probably much longer). If they can hit the target, they will work but 6-8 months is January 2011 at the earliest. Like I said above, this well will be flowing at least into 2011.

    The best solution to this problem was prevention, and its too late for it now.

  21. Barb noted, “My own personal experience: I have run across AMAZING individuals in this lifetime who wouldn’t think of screwing someone else over in order to become The Big Man On Top. Wouldn’t think of lying to the public. Wouldn’t think of putting him/herself at the front of the line if it meant others would be harmed.”

    All the people I know that are like that are UNEMPLOYED – and have been for a long time.

    Just the FACTS, Ma’am.

    A TRILLION $$$ is in the hands of war lords, drug lords and slave sellers.

    Get it?

  22. Regulatory Capture for land lubbers….

    Federal Reserve Adopts Megabanks’ Arguments, Warns Against Added Protections For Small Business Credit Card Users

    06- 1-10 06:54 PM

    “The Federal Reserve warned Congress in a recent report that protecting small businesses from the kind of “harmful” credit card practices it prohibits from being used on consumers would lead to a reduction of credit and higher borrowing costs for businesses — a similar argument advanced by the banks the Fed regulates.

    The American Bankers Association applauded the report and the Fed’s recommendation.”

  23. I absolutely agree with James’ description of the problem. I also agree, to various degrees, with commentors who posit deeper cultural reasons, such as a self-fulfilling prophecy of bad government.

    But I would like to suggest that the problem, in fact, is rooted even deeper than that in our culture.

    Our civilization is addicted to a high and sustained rate of growth in economic activity. Individuals have come to expect it; personal financial planning is predicated on it; the stock market demands it; our system of money creation through debt financing requires it.

    Continuous growth is incompatible with physical reality. This should not be a statement that requires explanation or generates any controversy. It is (or should be) a blindingly obvious physical fact. However, it runs directly counter to the requirements imposed by our economic system and our emotional expectations.

    When you have a fundamental conflict between the world you want to live in and the world that you actually live in, you quickly accrue leadership failures. Whether any given failure is due to well-intentioned bad judgment, corruption, cynicism, or stupidity almost doesn’t matter. If you eliminate one apparent cause, another will take its place because the problem cannot be solved within the context of the operating assumptions, but the operating assumptions are never questioned.

    At the end of the day, the problem isn’t one of ethics, or skill, or motivation, or altruism vs. selfishness. The problem is insanity: A person’s judgment cannot be other than poor since it necessarily starts with an unconscious decision to ignore reality.

  24. The agencies that have had the least problems with ‘capture’ are those with large professional and research staffs, with expertise in the relevant technical disciplines – I would mention the Nuclear Regulatory Commission and the FAA. Both industries have had excellent safety performance over the years, despite the occasional lapses in regulatory oversight. (I have experience working in both areas as an engineering psychologist. Just the fact that the government hires psychologists to research and make recommendations on the integration of humans into complex engineered systems tells you something.) I think the revolving door is less of a problem in domains where scientific and technical expertise dominates, because there is less disparity in pay between government and industry, and because we research types are motivated as much by interesting problems as by money, or more so.

  25. Written with surgical precision. I’m sure we’d both agree that even if you could write this with more clarity and brevity, and distribute it world wide…

    Nothing would change.

    So how do I prepare my children or grandchildren for a dark age?

    Or do we hold out hope for a miracle energy source, and a leap to the stars?

    Pandora looks more inviting every day…

  26. Yep. Upton Sinclair’s maxim, and all that. On the other hand, I do think there’s value in stating the problem in the most basic, stark terms possible, as frequently and widely as possible. In any given audience, there might be one or two people who are mentally positioned to respond to these ideas, and every ally counts.

    I think this is particularly true in the context of blogs like this, which are populated by people who have some familiarity with power and money, and yet are willing to acknowledge that the emperor is perhaps not as well dressed as everyone else likes to think. They need to understand and embrace the fact that the emperor is, in reality, running around stark naked gibbering at the moon.

    In the mean time:
    Make sure your kids understand the nature of the game being played; don’t let them buy the illusion that our lifestyle is in any way representative of the human experience over history.
    Educate them them so that they possess both ecological and industrial literacy; don’t let them grow up thinking that food comes from the grocery story, or electricity from the wall.
    Teach them real skills (and learn them yourself): gardening, hunting, fishing, sewing, cooking, preserving small machine repair, woodworking, the construction of simple tools.
    Learn to distinguish between activities that make money and activities that actually produce value. Practice the latter; avoid the temptation to pursue the former, even temporarily — it’s too easy to lose sight of your real goals and get sucked into the illusion.

    The tricky thing is that civilizational collapse is inevitable, barring a revolutionary shift in culture. (While I think that kind of shift is possible, and there is precedent, I wouldn’t bet on it either.) The direction we are headed and the ultimate destination is very clear. However, the timing is impossible to pin down. Collapse could happen in our lifetime, or not; we might even muddle along for another hundred years. So it’s important to build both modern civilization skills and grounded “real” skills. I don’t recommend building a survival retreat — you’re going to look pretty silly if you do that but missed the timing by a generation. Instead, participate in modern culture, and do whatever you can to influence it in a positive direction, but do keep one foot mentally out the door so that you (and your kids) are prepared to respond when the situation starts to change rapidly.

  27. A trillion in CASH…paper and coins worldwide

    C’mon, no way with all the financial geniuses on this site did you guys think you had CASH in your bank account…?!!

    All the “nyets” in my little town continue to came from the CASH carriers…THEY DO NOT WANT ANYTHING OTHER THAN DRUNKS DRUGGIES AND WHORES TO SUCCEED AS BUSINESSPEOPLE – after all it’s a “resort” town..

    I’m with Kliment regarding only possibility for “change” – use the mathematically SUPERIOR time, space and critical mass

    of broomsticks fighting off the high sea piracy acts that steal cement shipments…

  28. May I suggest a couple of lightening bolts thrown at your feet – “…dance…”


    Always looking for “love” in all the wrong places while Ma Nature does it for “free”…

  29. A Time for Moral Reckoning
    by Jim Wallis 06-03-2010
    I am watching unbelievable pictures tonight of endless swaths of brown oil mixed with the blue waters of the Gulf of Mexico, of dying wetlands and marshes, of miles of contaminated coastlines, of dead birds and animals, of helpless and hopeless Gulf Coast residents sadly witnessing their livelihoods and their lives slipping away. With the explosion and sinking of the BP oil rig six weeks ago, the immediate talk was about environmental threats and technical fixes, economic losses and political blaming, and debates about responsibility for the costs. But with the failure of the latest attempt to stop the spill, and with both BP and the federal government admitting they still really don’t know how much oil has already spilled or will spill, a national discussion is beginning about the fundamental moral issues at stake, and perhaps even a national reflection on our whole way of life based on oil dependence and addiction.

    After the failure of “top kills” and “cut and cap” strategies, it now appears the gushing of oil into the sea could continue until at least August, or maybe even longer. This could be one of those moments when the nation’s attention all turns to the same thing, as in 9/11 and the days after Katrina. To use an over-used phrase, this could be a “teachable moment,” but as 9/11 and Katrina demonstrated, we don’t necessarily learn the right lessons from teachable moments. This time we had better do so.

    First, we have to change our language. This isn’t a little “spill,” it is an environmental catastrophe — the potential contamination of a whole gulf (already a third is now off limits for fishing) and hundreds of miles of coastline, and it threatens to expand to an ocean and more coastlines. It will bring the destruction of critical wetlands, endanger countless species, end human ways of life dependent upon the sea, and now, it will increase the danger of a hurricane season that could dump not just water, but waves of oil just miles inland from the coasts.

    Theologically, we are witnessing a massive despoiling of God’s creation. We were meant to be stewards of the Gulf of Mexico, the wetlands that protect and spawn life, the islands and beaches, and all of God’s creatures who inhabit the marine world. But instead, we are watching the destruction of all that. Why? Because of the greed for profits; because of deception and lies; because of both private and public irresponsibility. And at the root, because of an ethic of endless economic growth, fueled by carbon-based fossil fuels, that is ultimately unsustainable and unstable.

    It’s not just that BP has lied, even though they have — over and over — to cover up their behavior and avoid their obligations. It is that BP is a lie; what it stands for is a lie. It is a lie that we can continue to live this way, a lie that our style of life is stable and sustainable, a lie that these huge oil companies are really committed to a safe and renewable energy future. BP should indeed be made to pay for this crime against the creation — likely with its very existence.

    But I am also reminded of what G.K. Chesterton once said when asked what was most wrong with the world. He reportedly replied, “I am.” Already, we are hearing some deeper reflection on the meaning of this daily disaster. Almost everyone now apparently agrees with the new direction of a “clean energy economy.” And we know that will require a re-wiring of the energy grid (which many hope BP will have no part in). But it will also require a re-wiring of ourselves — our demands, requirements, and insatiable desires. Our oil addiction has led us to environmental destruction, endless wars, and the sacrifice of young lives, and it has put our very souls in jeopardy. New York Times columnist Tom Freidman recently wondered about the deeper meaning of the Great Recession when he asked, “What if it’s telling us that the whole growth model we created over the last fifty years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said, ‘No More.’” The Great Spill makes the point even more.

    There is not one answer to this calamity; there are many: corporate responsibility, for a change; serious government regulation, for a change; public accountability, for a change; and real civic mobilization to protect the endangered waters, coasts, species, and people’s livelihoods. But at a deeper level, we literally need a conversion of our habits of the heart, our energy sources, and our lifestyle choices. And somebody will need to lead the way. Who will dare to say that an economy of endless growth must be confronted and converted to an economy of sustainability, to what the Bible calls stewardship. What about the community of faith?

    I am told this morning that the smell of oil is already apparent in the parks and playgrounds near the Mississippi coast. Unless this crisis in the Gulf finally becomes the wake-up call that signals a new national commitment to end our dependence on oil, our children may now be smelling their future.

    The first step forward is building awareness. Would you forward this blog to your friends?

  30. No. Fixing the “problem” does not mean throwing the baby out with the bathwater. Nor does it mean reflexively careening toward provably unworkable energy technologies that happen to have status as “renewable” and “green”, even though they are neither.

    We have problems, but we are not “the problem” as the Chesterton quote says. We are the solution. In fact, we are the objective.

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