One of the many unfortunate side effects of the timing of the 2008 financial crisis, coming as it did right on the hinge of a presidential transition, is that the terrible reality of many regulatory agencies escaped notice in the frenzy of avoiding collapse. Witness the latest from the Securities and Exchange Commission:
The U.S. Securities and Exchange Commission is supposed to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” It is odd, then, that the regulatory body decided last week to preserve one of the most egregious loopholes in the entire financial system. Money market mutual funds were effectively declared “Too Big to Fail” by the authorities in 2008 yet remain wholly unregulated. They are the rotten core of the shadow banking system—providing ridiculously cheap leverage to speculators courtesy of the American taxpayer.
The detail on money market funds is good and worth reading, but here’s the kicker:
After the crisis was over, the money markets were an area that seemed worthy of further scrutiny. Like asset-backed securities before them, they had appeared boring and safe when they were actually a large source of hidden risk. The industry, however, put up an unprecedented lobbying campaign against the SEC. As a result, it was able to avoid any changes the existing rules, even though they had proven so hopelessly inadequate prior to the crisis. How could this have happened? An excellent and detailed investigative report by Bloomberg provides an answer: the SEC is a captured organization whose employees regularly alternate between government and lobbying on behalf of the firms the SEC is meant to keep in line. It is not right to call this a “revolving door,” since that implies some kind of pause while going from one side to the other.
Let’s be clear. If the events described in the Bloomberg article happened in China, everyone would immediately (and rightly) decry cronyism and corruption. Why not do the same here?
This is some prime Monthly turf of late. John Gravois has done some excellent reporting for this magazine on the new financial regulatory agency, the CFPB, and Charlie Peters (our founder) spoke to Joe Nocera of the New York Times about it:
When I reported back to Charlie about my inspiring day at the new consumer bureau, he wasn’t surprised. “The beautiful thing about a new agency is that everyone is very driven to accomplish the mission. As they mature,” he added, “that’s when people become more concerned with self protection, and maneuvering for the next promotion.”
This is out of the question now, but after the next crisis (it’s coming, just wait) the value of new agencies should be kept in mind, and key regulatory bodies should be killed and reanimated. It wouldn’t have to be very complicated, even. Just fire everyone, maybe change the name a bit, and hire new people.
Just make sure none of the executives or managers have ever worked there before. (Call it the top 20% of positions.) Corruption will creep back in, count on it, but we’ll at least get some breathing space.