Disgruntled Fed Lawyer Blows Whistle on Regulatory Capture

In 2008, the monetary system plunged into acute crisis. The Federal Reserve, in charge of banking regulation—not to mention the dollar itself—didn’t see it coming. So in 2009, it hired David Beim to learn why not. He blames regulatory capture. In his words, it’s like “… a watchdog who licks the face of an intruder… instead of barking at him.”

Beim recommends hiring the kind of people who won’t get captured. Unfortunately, that flies against the wisdom of management legend Peter Drucker. He said, “The fault is in the system and not in the men.” In other words, don’t blame your people when your perverse incentives cause perverse outcomes.

The Fed hoped Carmen Segarra was the right kind of person, when it hired her in 2011 to regulate Goldman Sachs. On the job, she quickly noticed that Fed employees seemed afraid of Goldman, and thought this was backwards. She said, “The Fed has both the power to get the information and the ability to punish the bank if it chooses to withhold it.” Drucker was no advocate of fear as a motivator, either.

Increasingly disgruntled, Segarra secretly recorded her meetings with not only Goldman but Fed colleagues as well. She accumulated 46 hours of audio. I could not find it online, but This American Life worked with ProPublica on a program containing excerpts plus commentary by Segarra and Beim.

One player in her story is Mike Silva, the senior Fed regulator for Goldman. According to Segarra, Silva related a story from 2008. At the time, he was chief of staff for Timothy Geithner who was the president of the New York Fed. A large money market fund was collapsing and a general bank run was imminent. Silva told his staff, “… when I realized that nobody had any idea how to respond to that, I went into the bathroom and threw up. Because I realized this is it, it’s just this small group of people, and right now at this moment we have no clue.”

It’s like something out of Atlas Shrugged, missing only the whiskey and cigars.

The crisis occurred under Fed management. It admitted it didn’t see it coming. And now it’s obvious that the Fed’s top people didn’t know what to do, either. Despite that, there’s a steady drumbeat for more aggressive banking regulation. This is just plain wrong.

We understand authoritarianism when we experience it personally. Most of us have been stopped some time at a sobriety checkpoint. Have you ever had an officious cop demanding to know where you’re going, what you’re doing, and why? It’s infuriating.

A cop is nothing compared to a bank supervisor. Imagine being forced to invite him into your home. He eats and goes to work with you. He even sleeps in your home—you house him at your expense. He can demand to know anything he wants, and he “has both the power to get the information and the ability to punish” you. That’s the reality a bank lives with every day.

Americans fought and died for the vision of the Declaration of Independence. People should be free to act as they please, except in the case of crimes like robbery or murder. The government, by contrast, has no right to act, except as granted in the Constitution. We are reversing this, especially in banking. The final step will be to put government bureaucrats in charge of running the bank, with management passively along for the ride. Does this sound farfetched?

A chilling anecdote related by Segarra shows that it’s not. Goldman Sachs asked the Fed regulators to approve a deal they were doing with Banco Santander Banco Santander. According to ProPublica interviewer Jake Bernstein, Fed regulator Mike Silva knew that the deal was perfectly legal and wondered if he wanted banks doing these sorts of transactions.

Capture is just a distraction. Anyone who has to get permission for his every move tries to charm the decider. Just ask someone who has kids. The issue is the rule of law vs. the rule of men.

Do you want the government to have the power to decide it won’t let you do something, even when it’s legal?

 

The Gold Standard Institute Presents The Gold Standard: Both Good and Necessary, in Manhattan on Nov 1. You are cordially invited to join us for a discussion of ideas you won’t get anywhere else. The gold standard is the monetary system of the free market—of capitalism. Dr. Andy Bernstein, a rock star of the liberty movement, shows why capitalism is good. In my talk, I explain why capitalism is impossible with fiat money, and why we have not recovered from 2008, and we won’t without gold.

Keith Weiner is president of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of the precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona. In March 2015 he moved his Gold Standard column from Forbes to SNBCHF.com.
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