ZICAM, Banks, and the Illusion of Safety

Two days ago I remarked on the new, improved regulatory structure the Obama administration proposes for the financial services industry.  On the same day, the U.S. Food & Drug Administration (FDA) ordered a company called Matrixx Initiatives (MTXX) to stop selling its popular Zicam Cold Remedy.  Reading about the Zicam episode gave me some additional thoughts about the folly of financial regulation.

The good folks at ClusterStock kindly republished the letter FDA sent to Matrixx.   If you can get through the legalese, the FDA doesn’t exactly sound like a paragon of efficiency.  Their own Director of Compliance, who signed the letter, argues that Zicam is a “drug” that must meet FDA standards.  But Zicam has been nationally advertised for years without, apparently, any objections from the FDA.  Now, since a few people appear to have lost their sense of smell, the FDA is suddenly taking action.  What took so long?

The FDA is part of the same federal government that will soon, if the president gets his way, have a Consumer Financial Protection Agency.  Great.  At last, someone who will protect unwary consumers from Wall Street’s dangerous innovations.  Question: What assurance do we have that this new agency will be any more aggressive than the FDA seems to be?

The problem, in the case of either drugs or financial products, is not a lack of regulatory oversight.  We have plenty of regulators.  The problem is the existing regulators are either incompetent, under-powered, corrupt, lazy, or some combination of all four.  Why?  Many reasons, I’m sure, but here are two that spring to mind.

First, the people who are supposed to be acting as watchdogs are often trying their hardest to get jobs from the very people they are regulating.  The compliance department at every firm on Wall Street is filled with ex-SEC, ex-CFTC, ex-FINRA and ex-OCC employees.  And they make a lot more on Wall Street than they do working for the government.  So what happens is that the examiners who go into firms looking for trouble all too often regard their visit as a job interview.  It should surprise no one if they overlook a few violations.  Until this revolving door is stopped, no new regulations will be effective.

Second, our political system – for all its advantages – is subject to capture by determined groups that seek advantages from the government.  If a large number of wealthy and powerful people want to engage in behavior X, who is going to stop them?  Congress?  Please.  There is a reason Capitol Hill surrounded by legions of lobbyists, and it is not to help protect the little guy.

Like the FDA with Zicam, the Federal Reserve and other bank regulators were well aware a housing bubble was underway and that it would end very badly.  The Fed even had a big part in creating the housing bubble.  They did nothing.  Now we are to depend on them to protect us against systemic risk?  No, no, no.  They are systemic risk.  The last thing we should do is give the Fed more power.

But that’s what we’re doing.  Result: people will think someone is protecting them, when in reality no one is, and the powers-that-be will continue to rampage in pursuit of higher profits.  Nothing will change.  Congress and the president are rearranging the deck chairs on the Titanic – and you know how well that worked out.