Saturday, August 1, 2009


If You're Going to Establish a Cartel of Banks, Make Sure You Control It

Krugman links (with extreme official disapproval) to this Willem Buiter piece. Krugman excerpted Buiter's funny opinion of Larry Summers, but I was more interested in his (Buiter's) description of how the Fed installs its leadership. He concludes:
This arrangement amounts to one where a regulated industry, the US banks regulated and supervised by the Fed, elect their own supervisors and regulators. Regulatory capture is made inevitable with this institutional arrangement. Indeed, the governance structure of the regional Federal Reserve Banks, including the way in which they elect their Presidents, seems designed to ensure capture of the regulator/supervisor by the industry he is supposed to regulate and supervise in the wider public interest. It is an unbelievable and utterly insane arrangement from the point of view of the common good. It is a wonderful arrangement from the perspective of the US banking industry.

I was disappointed that Herr Buiter did not propose Prof. Murphy for next Fed chairman.
The idea of "regulatory capture" seems incredibly weak as description for a system set up to suit the captors to begin with. Maybe a more suitable description would be "regulatory entrapment".
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