Regulatory Capture in the Age of Trump
FAA employees warned as early as seven years ago that Boeing Co. had too much sway over safety approvals of new aircraft, prompting an investigation by Department of Transportation auditors who confirmed the agency hadn’t done enough to “hold Boeing accountable.”
- Boeing Had Too Much Sway in Vetting Own Jets, FAA Was Told – Bloomberg
By JM Hamilton (3-24-2019)
JMH spends a great deal of time describing the financial elite’s capture and takeover of the US government - indeed, most Western governments - via fiscal, foreign, judicial, monetary, and regulatory policy capture. The term “capture” can seem, at times, so ubiquitous that after awhile it can lose all sense of meaning.
This week, we break down regulatory capture in particular, and offer up some recent examples. There are two primary reasons to visit this issue: a) regulatory capture demonstrates how short-term myopia, driven by greed, often gets the better of the management & ownership class; and b) recent examples of regulatory capture, and the subsequent fallout, are piling up like so many wrecked cars, during an ice-storm on a miserable winter night.
Investopedia offers up the following definition of regulatory capture:
Regulatory capture is an economic theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating. The result is that the agency, which is charged with acting in the public's interest, instead acts in ways that benefit the industry it is supposed to be regulating.
That pretty much describes it. Regulatory capture has been around for decades, if not for centuries. None other than Adam Smith described the tendency of private enterprise to seek out favors from government, not the least of which are: removal of government oversight, and grants of monopoly, so as to maximize profits. Commercial interests often believe that if they can just rid themselves of those pesky regulators, they can send their products and services to market faster, and start generating revenue and profits sooner. Besides, as any capitalist - or establishment Dem or Republican - will tell you, markets are self-regulating. And that last part - markets are self-regulating - might be partially true within a healthy capitalist economy, as defined by many businesses competing w/in the same products or services sector. One major slip up - on a failed product or harmful service launch - and your company could very well become toast, as your competitors fill the product & reputational void.
But in today’s monopoly economy, healthy regulatory bodies - designed to protect consumers, labor, and yes, even companies and investors from possible ruin - are more important than ever before. In short, regulatory bodies, properly functioning, aren’t designed to thwart business, but rather, provide the rules of the road – the guardrails, if you will - for a healthy and safe economy, benefiting all factions: consumer, labor, management; & ownership.
Perhaps that is why successive Dem and GOP administrations – who all too often have willingly bought into the neoliberal paradigm (that markets are self-regulating) – have not only damaged (& underfunded) rules enforcement, regulations, and the regulatory bodies themselves, but also, in some cases, done irreparable harm to the businesses & investors they attempted to help through deregulation. But perhaps no administration has done more to make a farce of deregulation, & regulation, than the corrupt & crony Trump government. The Trump administration has allowed the revolving door to spin like a top between industry insiders & lobbyist, and the regulatory bodies.
To such as extent, the fox no longer guards the regulatory henhouse, but instead, the fox has purchased both the farm and the henhouse.
Under POTUS Trump, the regulatory swamp runneth over.
Here then, some ongoing & recent examples, of regulatory capture gone horribly wrong.
Boeing, the FAA, and the 737 MAX 8: It took two downed aircraft, the loss of more than three hundred lives, and globally, aviation regulators shutting down the 737 MAX 8, before the Trump administration and the FAA grounded and shutdown Boeing’s plane. Since then, it’s come out that the FAA has not only abrogated its responsibilities, but basically, has relied upon Boeing to self-regulate and certify the safety of its aircraft. Meanwhile, as the plane remains grounded, Boeing is suffering: unprecedented reputational costs; economic damages, as airlines pursue the loss of revenue from grounded equipment; cancelled existing and, possibly, future orders of the 737 MAX 8; future litigation from families of the deceased travelers on the two doomed aircraft; likely, shareholder litigation; a criminal investigation is underway; and significant loss of market cap – now running into the billions – as Boeing’s stock shares tank.
And thanks to industry consolidation, Boeing is likely too big to fail. Could a taxpayer funded bailout be around the corner?
We’ll find out. Here again, is an underfunded regulatory body, the FAA, that used to be respected around the world, and now, is a laughingstock. The black box, from the doomed Ethiopian crash? Sent to France for review and analysis. The FAA, along w/ Boeing, not only failed the customers & flight crews of the two doomed aircraft, but it also arguably failed itself, as a regulatory body, and the employees, management, and ownership at Boeing.
But ultimately, the blame goes to Congress – particularly the GOP - for underfunding regulatory bodies for decades, and failing to control the revolving door between the regulatory bodies and the industries the regulators were designed to oversee. Basically, crony capitalism in overdrive.
The FTC, the Justice Department, Failed Antitrust Enforcement, and Industry Consolidation on an Unprecedented Scale: In the last couple of weeks, Americans have seen the completion of several monster media mergers, like: Disney/Fox and AT&T/Time Warner. Now, Americans can receive their entertainment content and news – live streamed or televised – from several corporate leviathans.
And US news content will continue to increasingly become more homogenized, and sanitized, so that real news about government corruption, and the capture of our regulatory bodies by major corporations, conveniently, never makes it on the air, or, at most, receives very abbreviated attention. Increasingly, national news shows – overseen by their corporate masters – are often devoid of content, superficial, and substance free. Want real news, you'll need to read it from several different sources.
Here, blame the Justice Department and the FTC, not only for media concentration and cartel formation, but also concentration and vertical integration in industry after industry.
The formation of cartels and monopolies – and the failure of the FTC, Justice Department, & courts to enforce antitrust laws - has played no small role in: the formation of a Neo-Gilded Age; unprecedented wage & wealth inequality; the crushing of jobs, opportunity, & innovation; but also, a dearth in the number of startups and the elimination of animal spirits.
Want to know why the American Dream is dead? Look no further than the failure to expand and enforce antitrust laws.
The Federal Reserve, the Office of the Comptroller of the Currency, FDIC, et al., and Wall Street & US Banks: The Federal Reserve is one of the primary regulators of Wall Street banks. And today, Congress, the Fed, and various regulatory agencies are back at it: rolling back banking & derivatives regulations; lowering capital requirements (thanks to off balance sheet transactions, & offshore subsidiaries, who knows if the capital presently required is sufficient?); and enabling Wall St banks, US banks, and largely unregulated shadow banking to set America up for the next crisis.
Whether it’s allowing self-dealing (see the ISDA), the continuation of a derivatives & swaps market worth hundreds of trillions in notional value, watering down & dragging out rule making & enforcement (see the Volcker Rule), or allowing junk debt to continue to be rolled up into CDOs or CLOs and often, sold as an investment grade security instruments… the Federal Reserve, Congress, and the regulatory authorities were at the center of the 2008 crisis and will likely, be at the center of the next financial storm.
Complicit in all this, Congress often relies upon the banking industry, and their lobbyist, to write regulatory legislation that is vague, and ultimately, largely relies upon underfunded & understaffed financial regulatory bodies to interpret & enforce. Predictably, Congress, owned by the banks, passes the buck onto captured regulatory authorities. Moreover, some financial enforcement falls at the state level… all of which, further contributes to barriers of entry and the preeminence of the existing Wall Street banking order.
At this point, it would be hard to argue that Wall Street banks provide few, if any, products & services that are for the public good. Many Wall Street bank products & services have an angle, or binary outcome: their enrichment and the counterparties’ or public’s loss (see Wall Street’s role in financing private equity and LBOs). To this day, Wall Street banks remain too big to fail, the bulk of the derivatives sold are used for speculation and gambling, and yet, these banks remain federally insured (that is to say, reinsured by the US taxpayer).
And the banking cartel is responsible for the transmission of the Fed’s monetary policy, which now serves – nearly exclusively – surprise, Wall Street banks and the stock market. Ultimately, the Wall Street cartel serves itself, first & foremost, not the American economy, and certainly not, the majority of Americans.
What goes up is supposed to land, not crash…. Like Boeing’s planes & stock valuation.
We could go on and on.
The Congress insisting that the DEA not investigate Big Pharma over the opioid crisis; the Congress working with Big Pharma & the FDA to keep patented medication protected and existing drug monopolies & monopolistic pricing in place.
More than likely, yes.
At the center of regulatory capture is the stock market as the sin qua non of all economic endeavor, and the market’s constant need for higher and higher stock valuations and dividends. The market demands monopoly and monopolistic returns. The market demands that the consumer and labor always come last, and that regulatory authorities bow down to the very industries they are supposed to regulate. And the monopolies always insist that they need scale, colossal scale, to compete on the global stage; but that scale often comes – not w/ economies of scale – but diseconomies of scale. That is to say, the monopoly or multinational becomes so byzantine & Kafkaesque that no CEO, or management team, could possibly possess the ability to run, effectively, these giants.
Add in C-Suite pay packages, and the regulatory doom loop is complete:
The stock market + CEO pay packages + captured regulatory authorities & Congress = products, services, and business outcomes that are – all too often – detrimental to consumers, labor, the taxpayer, and in the long run, investors and shareholders (REPEAT).
Just ask the management team at Bayer, who purchased Monsanto, or perhaps, ask Boeing how regulatory capture - and FAA ownership - has worked out for them?
Some call it regulatory capture… JMH would argue its karma working its way around, inevitably, to bite the apex predators where it hurts most, in the wallet.
Copyright JM Hamilton Publishing 2019
