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. Voters have insufficient knowledge, time, and interest to make appropriate electoral decisions on the basis of matters of financial market regulation.(10) In the absence of transitory factors, such as severe economic dislocation, the public is not aware of the course, much less the details, of financial market regulation. This creates a disconcerting vacuum: the money and influence of the regulated--the financial institutions or businesses themselves--can fill the vacuum and thus capture regulation.(11) Even when transitory factors awaken the electorate, the popular alarm frequently triggers an overreaction, or a less than rational reaction. This political failure leads to regulation that is dictated largely by the weight of money interests, or political overkill and "random agendas."(12)
To deal with these realities, the United States is burdened by a fragmented system of financial market regulation. The current, largely politicized system of financial market regulation has fragmented regulatory power in an unprincipled and chaotic fashion. Three factors have led to this irrational fragmentation. First, on those occasions when the electorate focused on financial market regulation, it often cast its eyes upon the system with a high degree of suspicion towards "big business."(13) Second, statutory obsolescence has led to an outdated regulatory framework.(14) Third, "big business" itself has seen strategic advantages in protecting itself from competition and weakening regulatory power.(15) After decades of pursuing this fragmentation, powerful interests now are seeking the ability to assemble financial supermarkets or "universal banks," without any central regulatory authority.(16) This fragmentation has led to a unique form of regulatory competition that has stifled the development of sound financial regulation. To make matters worse, the largest corporations in America can choose from fifty different sets of state laws for corporate governance. Financial market experts have recognized that it is inappropriate for the government to erect artificial barriers to competition and "to divide the financial world into discrete segments."(17) What has been understated, however, is that segmented regulation similarly is obsolete. This dimension of political regulation adds an additional factor, specifically regulatory competition, in the pressures giving rise to regulatory capture. Fragmentation of regulatory power spawns real, not theoretical, problems and in the case of the savings and loan crisis alone contributed to a $1 trillion regulatory fiasco.(18)
The current regulatory structure fails to balance appropriately the costs and benefits of regulatory policy. Concentrated benefits frequently are extended to powerful interests at the expense of the general public, particularly if the costs are spread over the long term. Similarly, regulation in its current state permits the absorption of easily concealed costs for the benefit of those interests that stand to achieve real benefits in exchange. Thus, diffused and deferred costs are underweighted in policymakers' decision-making processes. Political gridlock and agency infighting has led to the reality that America has a twenty-first-century economy that is governed by Depression-Era regulatory structures.(19) Consequently, American financial institutions and corporations are hobbled internationally and there are gaping holes in the country's regulatory infrastructure. In short, the regulation of financial markets is seriously dysfunctional.(20) This Article posits that these problems reflect the inappropriate political influence that has corroded the public interest basis for financial regulation.
The foregoing discussion highlights the many needs of our modern economy with regard to financial regulation. First, regulatory policies must be determined through a process that maximizes the degree to which expertise may be brought to bear upon financial regulatory problems in order to respond to the challenges posed by globalization and increased complexity in financial markets. Second, regulation in this area must be able to respond to sudden changes in financial markets with rapid regulatory adjustments. Third, regulatory power must be centralized. Fourth, regulation of financial markets must be freed both of inappropriate political pressure and of inappropriate special interest influence. In short, financial market regulation presents a classic context in which an expert and independent agency is needed. Beyond this recognition, however, the questions that must be addressed are the degree of independence that is appropriate, and the legal structure needed to secure such independence.
This Article examines the degree to which depoliticizing financial market regulation can stem the problems discussed above. Financial market regulation is a vast subject matter; for purposes of this Article financial market regulation means the law of the capital markets of the United States. This Article attempts to articulate a theory of depoliticized regulation that can address the most obvious components of financial market regulation: the regulation of the public securities markets, as well as regulation of financial intermediaries such as banks, insurance companies, mutual funds, pension funds, and other financing institutions. Although presently there is no unified regulatory structure for these activities, this Article posits that there should be one. This Article demonstrates that the very fact that the regulatory system in this area has not been centralized is due to inappropriate and politically influenced regulation. Ultimately, this Article envisions centralized financial regulators with a great degree of political insulation. It is not possible, in the context of this Article, to review the history and failures of regulation in such a vast area. This Article...