POPS
Why Washington Delays in Solving Financial Crises
Introduction
As we saw in part I, government rarely acts to keep a bubble from getting out of hand. But surely when the bubble ultimately pops, governments do better? If only they did.
Many observers, including us, have been dismayed at how little and how poorly the financial system has been reorganized in the aftermath of the crash of 2008. Ideology, interests, and institutions all moved in the wrong direction.
As we show in chapter 7, the ideological positions of members of Congress elected before 2008 went virtually unchanged. The midterm elections of 2010 brought about not only a Republican majority but a movement of that party to the right after an influx of Tea Party members. As we show in chapter 8, the ideological response, in the form of populism, was weak. While Occupy Wall Street largely fizzled on the left, whereas the Tea Party on the right was quickly provided with direction and resources by elite fundamentalist free market conservatives, such as former Texas congressman Richard Armey and the Club for Growth.
A new set of dangerous interests was created in the pop by the government bailout and government-directed mergers and acquisitions. In the introduction we touched on PNC’s acquisition of National City Corporation with funds from the Troubled Asset Relief Program. In chapter 5, we showed how an account at a small bank in New Jersey eventually wound up at Wells Fargo after the latter acquired the failing Wachovia. More generally, the financial sector has become more concentrated, as further indicated by JPMorgan Chase’s acquisition of Bear Stearns and Washington Mutual, and by Bank of America’s acquisition of Countrywide Financial and Merrill Lynch. Many of Lehman Brothers’ viable operations were acquired by Barclays. The upshot is a less competitive industry that is now bigger than too big to fail.
After the Supreme Court’s decision in Citizens United v. Federal Elections Commission,1 the financial sector has new opportunities to use its resources to influence political campaigns.2 And because the concentration has eliminated all the old cleavages among commercial banks, investment banks, and insurance companies, the industry has better aligned political preferences and can lobby with one voice.3
Institutions sharply limited legislative response to the pop. In chapter 7 we show in some detail how pivotal politics played out, in the form of a Senate filibuster threat, to limit the content of both President Barack Obama’s stimulus package and the Dodd-Frank Wall Street Reform and Consumer Protection Act on financial regulation. Dodd-Frank, in our opinion, was far too complex and left far too much to the discretion of regulators. The costs of this regulatory discretion have been exemplified by the unseemly lobbying, most notably by MF Global’s CEO Jon Corzine of his former Goldman colleague, Commodity Futures Trading Commission head Gary Gensler, and by JPMorgan Chase CEO Jamie Dimon’s efforts to limit the regulation of derivatives and swaps. Institutions have also played out in Republican attempts to limit or repeal parts of Dodd-Frank. A filibuster threat torpedoed any possible nomination of Elizabeth Warren to head the new Consumer Financial Protection Bureau and forced Obama to circumvent the Senate by appointing Richard Cordray as bureau head during a Senate recess.4 Lack of consensus has left the future of Fannie Mae and Freddie Mac up in the air.
That the Three I’s—ideology, institutions, and interests—combined to render Washington an ineffective responder to the pop is not surprising. This time is no different. In chapter 6, we show how the Three I’s have shaped historical responses to pops, and argue that the Three I’s help explain some regularities about how American government deals with financial crises. Then in chapter 7 we demonstrate how the Three I’s reproduced these regularities in response to the events of 2008 and beyond. chapter 8 explores why the populist responses to the crisis were insufficient to push politicians through the hurdles created by the Three I’s. chapter 9 concludes.