28 September 2009

No Surprises

Financial fraud shock horror: Financial regulatory authorities have been captured. First, a little vocabulary: In administrative law, "agency capture" refers to agencies that are essentially captives of the industries/businesses that they are supposed to regulate. Back in the early 1990s, as a research assistant, I introduced some unexamined data sets and statistical rigor into a professor's work on structural racism in mortgage lending.1 I then began litigating those very issues. So, two decades later, imagine my nonsurprise at revelations that the Fed isn't regulating the (highly profitable) industry segments most in need of regulation.

The application of this principle to antitrust regulation — and, in particular, to monopsony regulation — since early in the Reagan administration is left as an exercise for the student. Or the merely cynical. Whether that has any lessons for the steadily consolidating consumer finance "industry", the entertainment and publishing industry, and/or American Needle shouldn't really require any additional though.

The real problem with/impetus for agency capture, though, comes from the legal profession's refusal to acknowledge its internal specializations. Bluntly, the only place the profession's structure provides to develop the expertise necessary to regulate an industry is through working within that industry. Going "career government" simply isn't an option anymore; hiring practices, political accountability and acceptability, and the huge disparity in workload, working conditions, and compensation make the true career regulator an exception... and drive the exceptional ones into the arms of the industry. This is even more of a problem with lawyers than with financiers because lawyers are required — by both common sense and by the supposed ethics rules — to look at and consider all aspects of a question before making/recommending action (or, too often, inaction). The lawyers in the trenches continue to do so; they're the ones who can't get promoted to being decisionmakers any more.

Finally, there's also agency self-interest to consider. I'm afraid that one of the best examples of this is the Copyright Office, which would be substantially smaller, less expensive, and less powerful if the US would join the rest of the world and abandon the registration requirement for copyright. Some argue that registration serves a useful purpose akin to title registration for motor vehicles and real property: It shows who the owner is. However, that comparison falls apart very quickly when one notes that changing owners for motor vehicles and real property requires an entry in the register... while doing so for copyrights does not. Too, the optional basis of registration under the US's idiosyncratic interpretation of the Berne Convention (which, essentially, denies that registration is a "formality" necessary to "enjoy" copyright because it isn't required... but that one can't get into court without it; it seems to me that the ability to get a court to enforce a copyright is a critical, implicit part of "enjoying" that copyright) also eliminates this as a cause. That, then, leaves the acquisition of works for the Library of Congress... which is what happens to deposits in the best case.

And why does all of this matter to authors? Why indeed; more to come, when some news I expect to break in the next ten days or so does, in fact, break.

  1. See Anthony D. Taibi, Banking, Finance, and Community Economic Empowerment: Structural Economic Theory, Procedural Civil Rights, And Substantive Racial Justice, 107 Harv. L. Rev. 1463 (1994). Professor Taibi had already reached the results stated in the article on principle and from anecdotal evidence; I merely analyzed the data, blind, and confirmed his suspicions. I was pretty creative in the data sources I consulted, but in the end I think that actually reinforced the article's conclusions.