When Good Agencies Get Corrupted

Posted by | April 28, 2011 11:31 | Filed under: Top Stories

by Stuart Shapiro

Political scientists used to write a lot about “agency capture.”  The idea was that government agencies became so entangled with the industry that they were regulating that they couldn’t help but do what the industry wanted.  The idea was largely discredited by the 1970s.  It was so discredited that few noticed when Congress started passing statutes that allowed significant portions of agency budgets to come from fees paid by the industry they regulated.  The result, as detailed in the Senate committee report on the financial crisis, looks a lot like agency capture (OTS is the Office of Thrift Supervision):

Between 2004 and 2008, OTS detected over 500 “serious deficiencies” in Washington Mutual’s operations. For example, OTS found that the thrift’s investment portfolio was stocked with billions in high-risk mortgage assets. However, OTS pursued no formal enforcement proceedings against Washington Mutual.
The thrift, which was the largest one under OTS’s supervision and the country’s eighth-largest financial institution, paid at least $30 million in annual fees to OTS from 2003 to 2008.  This accounted for 12 to 15 percent of the agency’s revenue. According to the report, this dependence caused “regulators [to] treat the banks they oversee as constituents rather than arms-length regulated entities.”

OTS also repeatedly attempted to stop the FDIC from downgrading Washington Mutual’s safety and soundness ratings.

Using fees to fund agencies is attractive, particularly in times of budget shortfalls.  Unfortunately doing so often has hidden pernicious effects.  These effects may not be seen for some time but when they come, they are doozies.

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Copyright 2011 Liberaland
By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.

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