Report From the White House: Wimpy Regulators and Red Tape

As advocates for shareholder rights, we strive to make sure our members are heard on important matters that affect all of our portfolios. That’s why the White House asked for feedback from The Motley Fool community and agreed to answer your questions. Here is the final installment of our interview with Austan Goolsbee, chief economist for the President’s Economic Recovery Advisory Board.

Economists have a term for what happened to Washington's regulatory watchdogs during the financial crisis. What looked to outsiders like an eight-year nap -- or, less pointedly, wild indifference or ignorance to Wall Street shenanigans -- was what learned market watchers call a raging case of "regulatory capture."

Regulatory capture happens when an agency tasked with acting in the public interest becomes a spokesperson for the industry it's supposed to be overseeing. In the most extreme cases, political finagling can completely de-fang the watchdog. That’s what happened in the 1880s, when the power of the Interstate Commerce Commission -- which regulated railroad freight rates -- was watered down under the guidance of Grover Cleveland's attorney general, who happened to be a former bigwig railroad-industry lawyer.

When David Gardner and I met with Austan Goolsbee, chief economist for the President's Economic Recovery Advisory Board, he sounded the alarm about letting the topic of financial regulation slip out of the public sphere: "The farther out of the public eye we are, the less transparency we have … the more the rules are being written by the people who are being regulated themselves," Goolsbee said.

Where exactly where the regulators when we needed them?
Red tape, laziness, unclear jurisdiction, obsolescence, corruption -- we can play the blame game ad nauseam. But it's clear that playing hot potato with the onus of responsibility does not protect investors or the overall health of our economy from systemic failures in our financial system.

Fool.com members had a lot to say about regulators' weak oversight of the institutions (and individuals) whose recklessness brought down the markets. Here are a few comments David Gardner and I brought to the White House on your behalf:

  • Afthought wrote: "Greater regulation is not the answer. Enforcement of existing regulations through prosecution and imprisonment of violators would bring a higher degree of honesty to the financial world."
  • Edfinn1 wrote: "[Ensure] transparency. The key to risk evaluation and reasonable risk taking is transparency. Derivatives are securities and should require at least the same levels of disclosure and transparency for offerers, underwriters and sponsors."
  • LessGovernment wrote: "Congressional legislation and lack of oversight had at this point put the entire economy on a course to disaster, and -- surprise surprise -- that is just what America got … Somewhere along the lines, members of Congress forgot why they are in Washington."

The White House's approach to better policing
President Obama’s regulatory reform proposal (links to PDF document) consolidates the regulatory power that had been spread out across a handful of agencies under one roof, and one central agency. Included in the proposal are plans to:

  • Establish a new Financial Services Oversight Council (FSOC), which is responsible for coordinating the efforts of all regulators. Make regulators more accountable, and put one person in the hot seat to answer for anything that slips through.
  • Clearly define what agencies will police what products. No more passing the buck.
  • Make hedge funds, private-equity funds and venture-capital funds register with the SEC and submit to more regulation.
  • Give the Fed the power to not only regulate parent companies, but also all their offshoots, including unregulated and overseas subsidiaries.

Here, Goolsbee describes the new regulation regime and why the administration says that the right kind of oversight is good for individual investors.

This is our time to speak up
We'll continue to cover and comment on this proposal and other bills, and we're committed to keeping our conversation with the administration going and representing you, our community of Fools.

Please share your thoughts about financial-regulation reform and what changes you, as an individual investor, want the administration to make. Use the comments area below.

Previous reports:

The official Dayana Yochim watchdog is currently sitting on her feet and awaiting payola (a.k.a. kibble). Dayana has no financial interest in any company mentioned in this article. The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2009, at 5:18 PM, PhulishMortal wrote:

    I've watched every one of these videos (and they're very good -- I would love to see these become a daily staple at TMF), but I have yet to see the most important question asked: is Dayana Yochim available?

    No, I jest; I'm happily married.

    If I weren't though, it would be tops on my list.

  • Report this Comment On October 23, 2009, at 2:02 PM, mountain8 wrote:

    We worry about new financial instruments being more complex, unfathonable, over-leveraged. Why not form a dept., similar to food and drug, that has to approve a new financial instrument, such as derivitives, before they hit the floor, not after they've contributed to economic chaos.

  • Report this Comment On October 23, 2009, at 2:11 PM, Jody0408 wrote:

    I hear a lot of flowery words, just like I did during the administration's campaign. But I didn't hear a lot of details on how they are going to accomplish the changes to the regulatory system we now have. Seems like the words from this administration often translate into legislation that creates huge government spending and bureaucracies. KISS, (KEEP IT SIMPLE STUPID), and don't try to go way beyond what is practical; what makes sense; what doesn't inhibit creativity. Can we Trust this administration to do the right thing? So far I doubt it.

  • Report this Comment On October 24, 2009, at 12:04 AM, AHominid wrote:

    The ONLY way to keep politicians honest is to have public financing of campaigns and eliminate all donations by lobbyists and private individuals. Once politicians can no longer be influenced by money or gifts, real regulation will happen.

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