Regulatory Capture Explains BP and Wall Street Disasters

Regulatory Capture Explains BP and Wall Street Disasters
By Gil Villagran, MSW June 2, 2010

The ecologically devastating BP oil spill in the Gulf of Mexico and the financially devastating crisis of Wall Street that just about destroyed our nation’s and the world economy are not unfortunate accidents that no one could have foreseen, and thus prevented. Both events are the result of human endeavors—drilling into the ocean floor to extract petroleum and creating financial instruments to extract profit from unsuspecting investors. Common wisdom may retort that industrial infrastructure requires evermore petroleum, thus oil extraction is necessary and at the same time, the banking industry is critical to finance the petroleum industry.

Obviously true, we need oil and money to extract the oil. However oil extraction is a very complex, dangerous and expensive business, and the oil, like all natural resources on public land or off our coast belongs to us all, as our natural bounty. Therefore, governmental permits are required to minimize ecological damage, worker safety must be considered to prevent injury or death, and fair compensation must be assessed from the extraction corporations. To this end, we have the Federal Department of the Interior’s Mineral Management Service (MMS). A federal office not only asleep at the switch, possibly criminally negligent with eleven workers killed, many more injured.

It is alleged that industry officials would fill in MMS inspection sheets in pencil, then federal employees would write over the pencil marks in pen, sign and file the forms as completed safety inspections. MMS staff whistle-blowers testify that some regulators took drugs, accepted gifts, and had sex with industry officials and lobbyists. But such shenanigans did not stop at the well head or the refinery, but also took place in the Washington, DC, offices of Secretary of the Interior Ken Salazar who named as his Deputy Assistant Secretary Sylvia Baca, after her eight years as a BP Vice President. Before this high level corporate position, she served as Interior Department Assistant Secretary for Land and Minerals Management. The so-called revolving door turns best to the benefit of those favored by both the industry and the federal bureaucracy. We can expect that when this latest BP monster movie is over, Ms. Baca and Mr. Salazar will be at the BP executive suites hosting or attending receptions for newly appointed officials at Interior’s Minerals Management. As President Obama tactfully put it, “For too long a cozy relationship between federal regulators and the industry has existed and contributed to this disaster.”

Naïve Americans might wonder; when did our nation slip into such corruption between government and industry endemic to Banana Republics and Third World nations? The pathetically banal answer is that corporate-government corruption is as American as apple pie; as Teapot Dome, as the 1954 CIA-United Fruit Company’s coup de etat against the democratically elected president of Guatemala; as Vice-President Dick Cheney’s Halliburton’s no-bid contracts for the Iraq War.

Nobel Prize economist Joseph Stigler posits that Regulatory Capture explains the process by which “regulatory agencies created in the public interest instead act in favor of the industry.” Journalist Thomas Franks writes in the Wall Street Journal, “Such misgovernment (occurs because) powerful institutions don’t like being regulated, which cuts into profits, interferes with their business, so they use the political process to sabotage, redirect, defund, undo or hijack the regulatory state.”

Congress legislates regulation and presidents appoint regulators, but both get elected with industries’ multimillion-dollar campaign contributions. At times BP hired longtime government VIPs as Leon Panetta (now CIA director), George Mitchell (Obama’s Middle East envoy), Christine Todd Whitman (former EPA director) and Tom Daschle (former Senate majority leader), paying them $120,000/yr. as advisers or board members. Their expertise on oil extraction is unknown, but their contacts to grease the wheels for facilitated regulation cannot be doubted. Is it any surprise when appointed regulators fall asleep at the switch, and then revolve into industrial executive appointments?