Quotes of the Day: How QE ‘Forever’ Represents Regulatory Capture and Crony Capitalism

Both quotes from Randall Holcombe at the Independent Institute

On regulatory capture

The basic logic behind the capture theory of regulation is that while the general public is largely ignorant of the regulator’s activities, those in the regulated industries are well-informed, and pressure regulators for favorable regulation. Furthermore, information about regulated industries is largely under the control of those in the industry, and personal connections between regulators and the regulated also influence regulatory outcomes. The result is that regulatory agencies act as agents for those they regulate, not the general public.

The Federal Reserve Bank’s recent QE3 announcement that they will be buying $40 billion in mortgage-backed securities a month for an indefinite period of time is an excellent example of regulatory capture. Under Chairman Bernanke, the Fed has successfully pushed to increase its regulatory role over the financial industry, and Stigler’s capture theory would predict that the Fed, as a financial regulator, would act to benefit the financial industry it regulates…

Just like the government’s purchase of Chevy Volts, the Fed is creating demand for a product (morgtage-backed securities) that is in weak demand, for the benefit of the industry it regulates.

On Cronyism

The Fed is buying the products of the financial industry—the mortgage-backed securities—just like the Defense Department is buying Volts that are the product of GM. In both cases, the purchases are designed to increase the demand for a product the government wants to support, for the benefit of the producers of the product.

If there are any differences, they are (1) that, as I noted above, the Defense Department may actually have a use for automobiles, but the Fed has no use for mortgage-backed securities, and (2) the scale of the operation. There’s a big difference between a purchase of $60 million in total and on-going purchases of $40 billion a month. So, looking at these two examples, QE3 is much more clearly an example of crony capitalism—designed to benefit cronies in the real estate and financial industries—and QE3 is crony capitalism on a much more massive scale.