Bernie Sanders Is the Cause of Cronyism

The consensus among pundits about the Democratic presidential debate is that Hillary Clinton “won” in the sense that she came across as trustworthy, likable, and “presidential.” I’ll leave to readers to ponder the use of words like these to describe someone who has been dissembling about her emails for years now and who angrily dismissed a Congressional investigation into the cause of the Benghazi attacks with “What difference, at this point, does it make?”

But for now, I’m more interested in another head-slapper, which is Bernie Sanders’s line: “Congress does not regulate Wall Street. Wall Street regulates Congress.” It’s a quintessentially political line. Clever. Pithy. Widely held to be true, and almost entirely false. In fact, something close to the opposite is true. It is the fact that Congress does what Sanders claims it does not do — regulates Wall Street — that leads to what Sanders falsely attributes to Wall Street, which is that it regulates Congress. 

Before you accuse me of being obtuse, I understand that Sanders did not mean that Wall Street literally regulates Congress. He meant that Wall Street controls Congress to get the regulations it wants. And I also understand that many Wall Street firms, like many businesses in general, influence government to obtain favorable legislation. So many of them are not sympathetic.  

Still, let’s pause for a moment to consider the implications of what Sanders actually said. (If we actually paid more attention to the words people use, they wouldn’t be able to get away with saying things like Hillary Clinton is “trustworthy” and “presidential.”)

Big, bad Wall Street is controlling a tame and timid Congress. That’s the gist of what Bernie Sanders is saying. Congress is meek and submissive. Wall Street is aggressive and overbearing. Wall Street has power. And Congress has . . . what?

Here are some data points to consider about the kind of power Congress, and, by extension, the government in general, possesses: Rudy Giuliani leading bankers out of their offices in the 1980s in handcuffs and then having many of his prosecutions overturned on appeal. Treasury bureaucrats threatening banks like BB&T with regulatory ruination if they don’t accept TARP funds. The government suing S&P for downgrading its credit rating. There are many more.

The power government possesses is the power to take all of your wealth and possessions, your freedom, your life. It has the power of physical force. We at ARI make that point a lot. It’s made by others far too seldom. It can’t be made often enough. 

And Wall Street’s power? Money — which means, the “power” to try to convince people to do what you want, to buy what you are selling or to sell what you want to buy.

True, Wall Street can use that money to influence Congress through campaign contributions and lobbying. But it’s perverse to equate that power, which is ultimately the power to persuade, with the power to destroy. And it’s sheer lunacy to claim that the one with the power to destroy is a passive victim.

That’s true even if those trying to influence Congress are doing so to procure laws that would destroy someone else’s business or take his property. This is the one point that makes what Sanders said not entirely wrong. Businesses often influence government to procure laws that help them by violating the rights of others. We should certainly morally condemn those people, but we can’t allow ourselves to forget that the reason they are bad is that they are trying to persuade the guys with the power of physical force to use it illicitly.

As I’ve often said, there’s a big difference between a business that influences government for that purpose and one that does so essentially in self-defense. But Sanders doesn’t care about that distinction at all. He isn’t complaining about the businesses that are trying to convince government to act improperly, by violating rights rather than protecting them. He’s complaining that Wall Street firms try to influence Congress at all.

Unfortunately, Sanders is not the only person who fails to make this distinction or to understand the fundamental reason that businesses try to influence government in the first place. A more sophisticated version of Sanders’s complaint is known by the term “regulatory capture.” The idea is that regulatory agencies often end up doing the bidding of the businesses they regulate. In these circumstances, the agencies are said to be “captured” by the businesses.

This is a real phenomenon. The fundamental cause is the same thing that causes cronyism and influence peddling, which is arbitrary power in the hands of government. I’ve written at length recently about why a government whose power is not limited by the principle of rights will necessarily end up being ripe for influence and cronyism, so I won’t repeat the explanation here. Suffice it to say that when government holds arbitrary power over the businesses and wealth of others — which is what regulation is — the only option for the regulated is to participate in the regulatory process and to try to ensure the rules make some sense.

For an example of how this ends up happening in practice, look at Dodd-Frank, which Hillary Clinton referred to during the debate as “start” down the road to regulating Wall Street properly. (For a glimpse of what lies at the end of this road, read Atlas Shrugged.) Dodd-Frank is in many ways a blank-check by Congress to a host of new and existing regulatory agencies to go regulate Wall Street. It was passed with the express understanding that the regulatory agencies would fill in the details of how they were going to regulate later. The predictable and logical result of legislation like this is that the regulated industries will flock to the regulators and try to have the rules written in a way that benefits them.

Indeed, often the regulated industries are invited to do so by bureaucrats, which is entirely predictable. Who else understands the business better than those who are in the industry itself? Do you think Bernie Sanders understands finance? If not him, then who is going to preside over the agencies that regulate Wall Street firms? The answer is Timothy Geithner, Hank Paulson, Lawrence Summers, Robert Rubin, etc. — all guys who worked on Wall Street or in the financial industry. This is the same in every regulated industry. All the securities lawyers I worked with when I was in private practice rotated from law firms, to regulated businesses, to the SEC and other agencies. They all knew each other and all worked together to fashion the regulations that applied to the industry. Is it surprising that they fashion regulations that they think make sense for an industry rather than those that will outright destroy it?

But even though the mechanism and results of this process should not surprise us, we still should not fail to make proper moral distinctions between those businesses who influence government to obtain regulations that harm their competitors and those who do so in self-defense. We also must understand that the fundamental cause of all of the efforts to influence government is bad government — that is, one not bounded by the principle of rights — and not bad people.

But the term “regulatory capture” and many of those who study and criticize the phenomenon don’t take these points into account. Just consider the term itself. Like Sanders’s statement during the debate, it implies that marauding Wall Street firms sweep into town and rape and pillage the poor regulatory agencies. But as I noted earlier, it is government that possesses the power in this relationship, not the businesses. In the past, I’ve likened government in this position to a mobster. Today, let’s go with pirates instead. Saying that businesses “capture” regulators is a bit like claiming that the hostages pirates take when they raid other ships have “captured” the pirates because they are allowed to choose between walking the plank and being keel-hauled. Regulatory capture doesn’t quite get to the cause of the problem, which is government, not the businesses it regulates.

And who is the biggest proponent of handing government even more of the regulatory power that causes all of the things of which he complains? Yup, it’s Bernie Sanders himself. If he wants to know why Wall Street is exercising so much influence over Congress, he should consider taking a long hard look in the mirror.

Image: Juli Hansen /