Faculty Soapbox: A perfect storm

In this column, I want to talk a bit about American politics, the banking industry and proposals to regulate this industry, because I believe that Americans are about to be the victims of a perfect storm in this area of the economy. As is often been the case, this storm will hit without much warning---other than that provided herein. To really perceptive students of American politics it is increasingly clear that a number of forces are moving American taxpayers, voters and investors toward a free-for-all without parallel in American history. Willie Sutton, a criminal of some notoriety during the mid-twentieth century, was once asked, “Why do you rob banks?” And his answer was, “Because that’s where the money is.” This tale may be apocryphal, but what is without doubt is that the banks still have a lot of money and that the greedy expropriation of these funds will make Willie’s take look puny indeed.

At first glance, much the opposite appears to be the case. Currently, President Obama, apparently tiring of his health care effort, has turned to proposing more stringent regulations on American banks. The concern is that they were part of the cause of the recent economic troubles and are in need of greater government control and a new agency to prevent their further deleterious impact on the economy. As is often the case among the naïve and simple minded, government regulation is the easy answer. The problem, of course, is that, in American government, agencies, especially those regulating powerful sectors of the economy, must, to be effective, have a political base. There is no such thing as impartial, non-political regulation in the American policy process. Agencies are funded and directed by Congress, and over time those regulated are often in a position to have tremendous influence over both the agency and those congressmen who direct it. As students of the policy process would have it, agencies are “captured” by those whom they were established to regulate. The reason for this is that those they are intended to regulate remain in existence long after the erstwhile reformers have moved on to other worthy causes. Moreover, those being regulated have a serious vested interest in how this is being done. “Capture,” then, is a fairly common phenomenon at both the national and state levels. In fact some industries welcome regulatory efforts because over time they expect to control the regulators and yet, to the public at large, can appear to be under government direction.

What makes the current situation markedly different from the past is the recent Supreme Court decision in Citizens United v. FEC (2010). In this decision, the Court greatly expanded its position in Buckley v. Valeo (1976), in which it held that the First Amendment allows individual candidates to spend as much of their own money as they wish in their election campaigns. Thus, in his recent re-election campaign for a third term as mayor of New York City, Michael Blumberg is reported to have spent $102 million of his own money. Now, in the Citizens United decision the Supreme Court has freed corporations and unions also to spend as much as they wish in campaigns. Consequently, banks are positioned to spend millions, perhaps billions, to elect the members of Congress who will be controlling the agencies established to regulate them. Basically the combination of constitutional law and congressional attempts at oversight will free banks under the façade of regulatory control to do pretty much as they wish. They will be able to pour huge amounts of money into politics and will expect substantial rewards. In the words of Ronald Dworkin, Professor of Law and Philosophy at New York University, in a recent New York Review of Books article (February 25, 2010): “The Court has given lobbyists, already much too powerful, a nuclear weapon.” It will soon become exceedingly difficult to tell the bad guys from the good guys. In this situation, those still concerned about clear moral distinctions might well be tempted to ask, “Where’s Willie Sutton when we need him?”