Financial regulation sounds a whole lot like high school

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I finally got around to listening to This American Life’s radio piece about Carmen Segarra and her secret recordings while working for the Federal Reserve Bank of New York. Even if the subject of financial regulation doesn’t typically blow your socks off, I’d highly recommend listening to the podcast, which features TAL’s typically tremendous mix of information and entertainment. At the very least, read the transcript.

The episode is about something called “regulatory capture”, which is a phenomenon we see in a lot of industries, particularly finance and banking. As the piece puts it, regulatory capture is a lot like when there’s “a watchdog who licks the face of an intruder and plays catch with the intruder instead of barking at him”.

Why does this happen? We often point to the “revolving door” separating industry and regulation, where people bounce back and forth between the private sector and the regulatory agencies, dulling their incentive to be tough on the companies they’re regulating now but might work for in the future. But the piece seems to suggest there’s something more purely psychological than that at play.

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