What Bank Regulators Can Learn From Previous Regulatory Agencies

What Bank Regulators Can Learn From Previous Regulatory Agencies

Benjamin Ross: Can Bank Regulators Learn From the Past?

The biggest question about the financial reform bill that the Senate has just started to debate is whether it can stop what’s called “regulatory capture”–the tendency of supposedly independent overseers to submit to the influence of the industries whose bad behavior they’re supposed to curb. Bank regulators’ cheerleading for the practices that created the current financial mess is only the latest instance of a century-old pattern.

How do we turn lap dogs into tough cops? The history of environmental regulation has lessons to teach. The legacy of pollution that haunts us today was created not by ignorance alone but also through ineffectual oversight. Pollution control agencies came into existence fully a hundred years ago, but their efforts were largely stymied. Bureaucratic and political battles erupted on occasion, but until the 1970s the polluting industries were almost always the victors.

The overriding lesson of this history is that people matter much more than organization charts. In not a few cases, government agencies switched sides over the years. When DDT was introduced during the Second World War, Agriculture Department scientists warned of a danger to the balance of nature and briefly succeeded in banning civilian spraying, while Public Health Service doctors trumpeted the pesticide’s safety. By the sixties, Agriculture was the defender of pesticides and the Public Health Service the skeptic.

The Bureau of Mines, established in 1910 as a health and safety agency, was converted into an industry-funded consulting service by Secretary of Commerce Herbert Hoover. It again pushed for pollution control after Louis McCabe, first chief of the Los Angeles air pollution district, was put in charge of its environmental work in 1949.

Leadership is not all. Organizational cultures, for good and for ill, can be hard to change. The Eisenhower administration put the Bureau of Mines under the supervision of Felix Wormser, a long-time lobbyist for the lead industry who had orchestrated the defense of lead paint. Wormser, it would appear, was unable to bring his subordinates to heel. Instead, the Bureau was put out of the pollution business entirely. This was among the main provisions of the Air Pollution Control Act of 1955, an Orwellian-named statute whose main effect was to keep the federal government from exercising any control.

A more successful transition was made in the 1970s. Most of the organizations that came together into the new Environmental Protection Agency had long-standing reputations as polluters’ friends. Yet the new agency–within months in some domains, only gradually in others–created a bureaucracy that was committed to its mission and willing to take on established interests to do it. This was accomplished through leadership–the political situation required even Richard Nixon to put genuine environmentalists at the head of PA–and a rapid expansion of agency staff at a time of public ferment, bringing a wave of idealists into government employ.

The designers of financial reform would be wise to study the lessons of the past. Worry about culture, not mission statement. Ask who will be in charge and who will do the work. Put new powers and new agencies where the leadership will be most committed and the staff most competent and independent.

Above all, effective regulation requires finding good people and relying on them. Last Thursday’s appointment to the Federal Reserve Board of Sarah Raskin, a Maryland official with a pro-consumer record, is a positive sign, but much more needs to be done before the financial system is back under control. The next steps are up to the Senate. We will soon see whether regulators are to be empowered with the authority and independence they need.