Seven Myths. Nay: Seven Follies (II)

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Wondering what I mean when I say that the Federal Reserve System is de facto captured by the banking sector and by Wall Street, which it should instead oversee? I mean things like this.

We will now have as President of the most important Fed in the country the "architect" of a failure (how else to label the central bank's response to the financial crisis?) and as a Secretary of the Treasury his former boss that approved and implemented the failed strategy (while he was busy making "innocent mistakes" with the IRS).

You may also want to keep in mind that Dudley

resigned as chief U.S. economist at Goldman Sachs in October 2005. He remained with the New York-based firm, which he joined in 1986, as a consultant and co-chair of the group that oversees the firm’s retirement-fund assets.

Apparently he has been at the Fed only since January 2007, hence my early claim that he was sitting for a year and a half on a conflict of interest was incorrect  (the Bloomberg release was ambiguous, and I interpreted it wrong. Apologies. ) On the other hand, this suggests that a person that has been in the Fed system for only two years, with a whole career in the investment banking sector is now running the most important Fed. One should not be surprised, then, if his preferences, models of the world, value system and goals allign all quite well with those of the industry he should instead oversee. The world "capture", I should stress, does not mean "corruption", or "in the pocket": quite the opposite. It refers to the fact that through mechanisms such as these the regulator progressively sees the world more and more through the glasses of the regulated. Because regulatory activity is highly judgmental and requiring an enourmeous amount of independence, clear critical thinking and "orthogonality" of interests, capture is unambiguously bad. 

Wondering how he was picked to replace Geithner? Here you go:

Stephen Friedman, a former Goldman Sachs chairman who was also director of the National Economic Council from 2002 to 2004, headed the panel to find a successor to Geithner, 47.

Not good omens for the future, I guess. This is what happens when regulators are captured by the special interests they are supposed to regulate and independently monitor.