Depoliticizing Financial Regulation
Ramirez, Steven A., William and Mary Law Review
Over the past few decades, scholars have called into question the ability of regulatory agencies to function effectively in furtherance of the public interest.(1) Since midcentury, they have amassed convincing evidence that agencies can be captured through, for example, "iron triangles" between Congress, agencies and those supposedly regulated.(2) More recently, regulatory scholars have articulated various theories of regulatory conduct and used differing terminology to describe capture. Nonetheless, there is broad agreement that special interests can act within the context of political subsystems, where isolated regulatory actors are subject to various forms of pressure, causing regulatory policies to serve special, rather than public interests.(3) These political subsystem actors often can subvert regulation when political conditions fail to provide appropriate checks and balances.(4) Congress itself is frequently co-opted in much the same fashion as are regulatory agencies.(5) This Article explores whether a certain degree of agency independence from the legislative and executive branches can break down iron triangles and provide a basis for effective depoliticized regulation, in the specific context of financial market regulation, where now there is a compelling need for such a regulatory framework. The Article concludes that the Federal Reserve Board's administration of monetary policy exemplifies the possibility of depoliticized regulation. The Federal Reserve Board has demonstrated that if Congress provides broad delegation of authority to a singular agency with a high degree of political independence, then effective regulation is likely, free of special interest :influence and of transitory political forces having less than rational agendas. While focusing upon a relatively narrow area of regulation, this Article argues that effective, relatively nonpolitical regulation can be achieved within the framework of our Constitution. Finally, using financial market regulation as a model, this Article addresses the conditions under which depoliticized regulation is most appropriate.
Financial market regulation provides an excellent context for considering these issues because of its spectacular regulatory failures and the current dynamics facing the regulatory structure governing our financial markets. The world financial system is becoming exceedingly complex. Even the most respected regulatory experts, including Federal Reserve Chairman Alan Greenspan, have observed that with the accelerating globalization of capital markets, regulators have insufficient knowledge to prevent a major catastrophe.(6) One major challenge is that the world is more economically interdependent than ever. New technology has given rise to new types of transactions, particularly derivatives transactions, that link financial institutions to markets around the globe.(7) One market crash, in far off East Asia for example, can roil financial markets in London, New York, and Frankfurt. In the summer of 1997, East Asian instability took the financial world by surprise. The fact that regulators, investors, and financial experts equally failed to predict the gravity of the problems arising from the collapse of the "Asian Tigers" demonstrates how rapidly the financial world is evolving. This evolution has overwhelmed the legal system's ability to keep pace, and raises a high-stakes and compelling question: Is Congress institutionally capable of meeting challenges to regulation in this area on a timely and thorough basis.(8)
Concomitantly, globalization and technology have created incentives for financial institutions and other business organizations to consolidate and reach beyond national frontiers. The profit potential and increased girth of such consolidated entities necessarily mean that these institutions have enormous economic power.(9) In light of this and the increasing complexity of financial regulation, the democratic process seems particularly ill-suited for making informed decisions on matters of financial market regulation. …