One has to be very, very obstinate (economists call this problem ‘tunneling’) to not see that regulatory failures played major roles in two recent disasters, one financial, the other environmental.
In the financial meltdown, regulators failed to even enforce the laws on the books. From the Securities and Exchange Commission (SEC) to the Office of Thrift Supervision and the Federal Reserve, which ignored it’s responsibilities to protect consumers, an apparent philosophy that markets would control themselves helped fuel risky investments and raw leverage that exploded economies.
Then a British Petroleum deep water oil rig in the Gulf catches fire and collapses into one mile of ocean, leaving a blownout drill hole on the seafloor spewing out hundreds of thousands of gallons of oil into the Gulf. And no one had a plan in place to manage such a disaster. Here the regulator caught sleeping on the job is the Minerals Management Service (MMS), which simply left everything up to British Petroleum.
James Surowiecki, staff writer for the New Yorker Magazine, wondered about this problem in a recent article entitled “The Regulation Crisis:”
“M.M.S.’s bad behavior was unusually egregious, but it’s hard to think of a recent disaster in the business world that wasn’t abetted by inept regulation. Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health, and decided to let Wall Street investment banks take on obscene amounts of leverage, while other regulators ignored myriad signs of fraud and recklessness in the subprime-mortgage market.
These failures weren’t accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.”
Surowiecki argues that it’s not so much the regulation and the regulators, it’s the public’s attitude towards regulation that matters most. If the public doesn’t trust government regulators, then the regulators have no clout. They can’t do their jobs. They won’t be adequately funded by a Congress reflecting the public’s attitude.
“Given that we still spend tens of billions of dollars on regulation every year, it may seem odd that attitudes can matter this much. But the history of regulation both here and abroad suggests that how we think about regulators, and how they think of themselves, has a profound impact on the work they do. The political scientist Daniel Carpenter, in “Reputation and Power,” his magisterial new history of the F.D.A. (one of the few agencies that’s been consistently effective), argues that a key to the F.D.A.’s success has been its staffers’ dedication to protecting and enhancing its reputation for competence and vigilance. That reputation, in turn, has made the companies that the F.D.A. regulates more willing to respect its authority. But that’s a rare success story. In most other cases, as the idea of regulation began to seem less legitimate, regulators became less effective and companies felt more free to ignore them.”
Beezer here. Read the article in its entirety. It’s not long, more of an editorial than a full length article.
The simple fact is, we’re plagued by a philosophy that trusts private corporations too much. The simple reality is that the pursuit of profit alone without any countervailing sense of communal responsibility will inevitably impose huge losses on a nation’s economy. Sensible regulation, fairly applied, can help avoid these types of problems.
