07/26/2008 05:12 am ET Updated May 25, 2011

Well Regulated BS

The solution to the financial crisis, we are told by some of the brightest and best, is more and better government regulation. But as long as the regulators are tied down, tied in knots, and hamstrung by politicians who are legally bribed by those that are supposed to be regulated -- a better regulations fix is at best an illusion.

Hedge funds, banks, mortgage lenders, and most recently Freddie and Fannie, are supposed to be prevented in the future from doing in millions of homeowners, and sticking the tax payers with trillion dollar bills -- by new regulations. For instance, "There's nothing bad or wrong with broker deposits; we just have to be sure as regulators that they're used in a safe and sound manner" (Scott M. Polakoff, CEO of the Office of Thrift Supervision). And "We look forward to ... working with the Treasury, members of Congress, and regulators on reforms that will enhance the competitiveness of the US economy and maintain the delicate balance between appropriate regulation and the need for a more flexible and efficient system of financial supervision" (Rob Nichols, President of the Financial Services Forum). Also "The Federal Reserve today has adopted regulations implementing the Homeowners Equity Protection Act, passed in 1994...[which] will make the problem of irresponsible lending far less likely in the future" (Barney Frank, House Financial Services Committee chairman).

Regulators, however, do not work in a vacuum. They enforce regulations set by Congress or various commissions, which are thinned out, if not gutted, by politicians who received major donations from guess whom? Hedge funds, banks, and mortgage lenders, Freddie and Fannie. The Wall Street Journal reports that the housing industry has given more than $95 million in donations to politicians such as Christopher Dodd and Richard Shelby (the ranking members of the Senate Banking Committee), and House Financial Services Committee chairman Barney Frank. Moreover, as the New York Times reports, these firms hire the relatives of politicians and even the fine folks themselves, once they tire of living off the public trough: "They have hired many officials who have worked for the last two administrations alone. Fannie hired Jamie Gorelick, a former deputy attorney general in the Clinton administration; Thomas E. Donilon, who was that administration's chief of staff to the secretary of state; and Franklin D. Raines, who was President Clinton's budget chief."

Moreover, regulators need staff and computers and other such resources. Thus another way Congress has to keep them from doing their job is putting them on a much reduced budgetary diet. And not hiring new staffers, when some retire. And jumping down the throat of those whistle blowers who speak up and tell one and all that the regulators are a bunch of lap dogs, kept on a short leash.

In short, if you want to rein in some of worst facets of capitalism, the guys and dolls who do not mind throwing people out of their homes, who sell people mortgages that these speculators know people will not be able to pay, you must start with the politicians. As long as politicians can take money from the industries that are supposed to be regulated, tax payers will keeping paying for the profiteering of these industries. If these tax payers are not willing to vote for a mandatory full public financing of elections -- which works well in Britain for instance -- they should not blame anyone else for being fleeced, short changed, and kicked out of their homes.

Amitai Etzioni is a Professor of International Relations at The George Washington University. He is the author of several books including My Brother's Keeper and From Empire to Community: A New Approach to International Relations. He can be reached at