Posts Tagged ‘politicians control regulators’

Regulations fail because political leaders want them to fail

January 9, 2013

The history of regulatory failures across time and across nations informs us that government regulations fail primarily because political leaders wish them to fail. For the most part, they do not fail because of inherent weaknesses in the rules or in the established mechanics for enforcing those rules:

From Fukushima or press scandals, from the Challenger space shuttle or the financial crisis, we tend to blame the machinery and the operatives for systems accidents. But the real responsibility generally lies higher.” John Kay, ‘Leveson should have learnt the lesson of the banking crisis’, Financial Times, January 9, 2013

Whether or not regulations are enforced effectively depends on the ruling climate in which political leaders scratch around for votes and campaign finances. Let me illustrate with respect to two examples of regulatory failure, namely the U.S. financial crisis of 2008, and the British press hacking crisis of 2011.

The U.S. financial crisis of 2008 manifested itself in the housing market which collapsed under the immense burden of junk mortgage bonds distributed by four corrupt federal government agencies, the Securities Exchange Commission, the Federal Housing Authority, Freddie Mac, and Fannie Mae.

Why were these agencies corrupt? Primarily, they were corrupted by several presidents, including Jimmy Carter, George H.W. Bush, Bill Clinton and George W Bush, and by ruling majorities, Democratic and Republican alike, in the House of Representatives and the Senate, all of whom pursued political objectives of pandering for votes to would-be home owners too impoverished and/or too prodigal ever to be entrusted with mortgage finance. Specifically, those political leaders were scratching for votes among minority populations, fully aware that financial institutions would be put at risk by their selfish, short-term vote-seeking ambitions.

Once the crisis occurred, and while the political climate seethed with anger and discontent, the same politicians retreated largely from housing market politics, allowing the private sector financial institutions to tighten their lending rules, while bailing out disgraced public agencies with taxpayer dollars to mitigate the political loss. New regulations drafted into law by Dodds and Frank – two especially corrupt politicians – had all the noise ‘of stable doors being firmly shut behind the horse.’ (John Kay, ibid) Already, as the political climate over housing eases, the political leaders of both parties, including President Obama, are retreading their routes into the mire of promoting house-ownership among the indigent and profligate, whose votes they still so desperately seek.

The 2011 British press crisis manifested itself in mounting evidence of phone hacking designed to publicize the private lives of people through the popular press, especially, though far from exclusively, under the control of magnate Rupert Murdoch. Once again, initial criticism focused on the failure of the self-regulatory Press complaints Commission, though later attention focused on high-level corruption within the Metropolitan Police, as evidence mounted that senior members of that establishment were selling private information to journalists. The Leveson inquiry has exposed a high level of corrupt dealings between the agencies of government and the media.

In fact, all the behavior chronicled by Lord Leveson was already illegal long before the onset of the scandal. The journalists simply felt that they could get away with such crimes, and for the most part, prior to 2011, they were entirely correct in this judgment. Most especially under the Labour governments led by Tony Blair and Gordon Brown, Rupert Murdoch effectively controlled the behavior of the political establishment through his assumed ability to mold electoral opinion through press manuipulation.

“Until July 2011. What changed was not law or regulation but the political climate. Before then, politicians regarded a close relationship with sections of the press – and in particular with those parts of it associated with Rupert Murdoch – as essential to gaining and retaining office. After that date, a close relationship with press barons became a liability. Wide-ranging investigation of journalistic wrongdoing and prosecutions followed.” John Kay, ibid.

The real problem, in both cases, is that political leaders do not relish living under the rule of law. As soon as they stretch their grimy fingers across that system of rules, imposing the rule of men over the rule of law, they attack the integrity of the market system in ultimately disgusting attempts to line their own deep-pockets without regard for the well-being of those whom they are elected to serve.


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