February 6, 2008

capitalism + regulatory capture

Wachovia apparently continued doing business with some fraudulent telemarketing companies (the kind of people who try to get your bank account information over the phone) after they'd heard many, many complaints about them. For the obvious reason - "We are making a ton of money from them." Partly in fines for all those returned checks.

What's interesting about this is that Wachovia's positions is perfectly sensible, within the assumption that companies should maximize only profit. The people who were asleep at their jobs here were the regulators:

"In the last three years, government agencies have sued several companies accused of routing telemarketing thefts through at least nine banks, including Wachovia, the largest company named in those lawsuits. However, Wachovia and most other banks accused of involvement in similar frauds have never been publicly fined or prosecuted by federal regulators for aiding telemarketing criminals."

Regulated companies, etc, in the US tend to have significant power and negotiating ability with the regulators, a situation referred to as regulatory capture (i.e. regulators serve the interests of those they regulate). One consequence of regulatory capture is that situations like this need to be resolved in the courts because they can't be prevented or addressed by enforcement agencies.

Best way, for my money, to reduce litigation and related expenses is to have effective regulation. Prevent problems or fix them through enforcement - then no one needs to sue.


amelia said...

aaactually, remember the point of smith, _american business and political power_, is that bureaucratic capture doesn't really work unless the issue is very low-visibility. i know we didn't so much love smith, but he's not wrong on that point, empirically.

(although he can't and doesn't account for the tendency of the bush administration to stock regulatory agencies with people who are already captured.)

Laurel said...

I thought the point was that it didn't work to affirmatively get legislation passed, but did allow business groups to weaken enforcement provisions. There are a lot of dramatically ineffective US regulatory agencies, including the Federal Housing Administration on fair housing, the USDA on meat safety, the Dept of Ed on NCLB compliance (though here they're being captured by other government agencies) - and those are just ones I've recently thought/read about.

I stand by more effective regulation as a cure for excessive litigation, though.