Let's distinguish between crony capitalism and regulatory capture. An exemplary case of the former is the way in which campaign donations can be linked to financial support during the 2008 bail-out, the so-called 2008 Troubled Asset Relief Program, (as I learned from Diane Weinert Thomas): "firms that lobbied or had other types of political connections were not only more likely to receive TARP funds, they also received a greater amount of support earlier than firms that were not politically involved through lobbying or direct political connections. For every dollar spent on lobbying during the five years prior to the TARP bailout, firms received between $485.77 and $585.65 in TARP support." This is an unremarkable (albeit harmful), legal form of corruption.* Such trading of political favors is also an endemic, even inherent feature of democracy, as the ninth century political philosopher Al-Farabi noted in his Political Regime (section 114) [recall; and here].
But in the aftermath of the financial crisis, it's so-called regulatory capture that captured the imagination not just of academics, but also of insiders within the financial industry. I first saw it linked to the financial crisis by the Dutch banker-economist, Willem Buiter, who coined the term cognitive regulatory capture to describe the intellectual bubble that forms among central bankers, financial industry, and certain economists (recall this post on the roots of the idea in Chicago economics). A shared intellectual framework had corrupted regulators so that they did not pursue options that could have served the public interest rather than the partial interests of the financial sector (and privileged agents within it).
But, in the (ongoing) aftermath of the financial crisis, it also became a trope to see the flawed oversight that preceded it and the monetary and fiscal policies that followed it as evidence of regulatory capture in the technical sense: it "occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether." As the regulated issues become complex and technical the opportunities for regulatory capture only increases. This has become a core intellectual commitment in the literature on so-called international political economy (IPE). (Full disclosure: my department has two leading figures in that field, Geoffrey Underhill and Daniel Mügge.)
I return to regulatory capture (of the cognitive and the straightforward lobbying side) in future posts. But here I want to note a historical irony. These days regulatory capture is entrenched within the critique of neoLiberalism. But the idea of regulatory capture was developed by the Chicago economist (and Nobel laureate), George Stigler (see this classic 1962 paper and also his Presidential Address to the AEA) [recall this post, too], and is also strongly associated with the so-called public choice literature associated with the Virginia school of (other Chicago trained economists) Buchanan and Tullock and law economics (see this classic article by Coase). That is to say, the intellectual framework of regulatory capture was developed to help understand and criticize the effects of the New Deal and became influential in the aftermath of understanding the successes and limitations of the Great Society by market-friendly economists.**
The issue is not just ironic. If the proper functioning of markets (let's stipulate that's desirable) requires the right sort of legal and regulatory framework (whatever that may be) then the theory of regulatory capture tells us that it will be nearly impossible for the political and regulatory process to achieve that desired outcome. To put the point more tragically: it's often thought that economists presuppose a tacit theodicy (and it is true that much bread and butter economics can be traced back to the mathematics and tacit metaphysics of Leibniz, Euler, and the Bernoullis); but the theory of regulatory capture teaches otherwise: we should expect not to live in the best possible world.
*Even if we grant that a financial transaction falls under (legally protected speech), we can still note that some speech is immoral, vicious, or hateful.
**The idea predates the 1960s, of course. It can be traced back (as Stigler acknowledged) as far back as Wealth of Nations and even the much (unfairly) maligned Pigou noted the phenomenon.