Why Is This Time Different?

I strongly suspect that I will never read James Kwak’s and Simon Johnson’s book, 13 Bankers. If it’s as described by James Kwak in his post this morning:

In 13 Bankers, Simon and I argue that the key forces behind the transformation of the financial sector and the resulting financial crisis were political, not simply economic. To this argument, at least two good questions spring to mind: Why finance? And why then? Hacker and Pierson have good answers to both of these questions. Their answer to the latter question is better than (though not inconsistent with) the answer we gave in our book.

To the former question, their argument is simple: business interests in all sectors organized a takeover of political power that pushed organized labor and other groups protecting middle-class interests to the sidelines and made possible decades of policies that have enriched the super-rich at the expense of everyone else, including the merely affluent. Finance was simply the biggest and most profitable of these sectors–and, we would emphasize, the one best able to hold the government hostage in a financial and economic crisis.

The answer to the second question is a bit more involved but particularly important. Many people, including Simon and me, have observed that American politics and the American economy reached some kind of turning point around 1980, which conveniently marks the election of Ronald Reagan. (We also pointed to other factors such as the deregulation of stock brokerage commissions in 1975 and the high inflation of the 1970s.) Other analysts have put the turning point back in 1968, when Richard Nixon became President on the back of a wave of white, middle-class resentment against the 1960s. Hacker and Pierson, however, point the finger at the 1970s. As they describe in Chapter 4, the Nixon presidency saw the high-water market of the regulatory state; the demise of traditional liberalism occurred during the Carter administration, despite Democratic control of Washington, when highly organized business interests were able to torpedo the Democratic agenda and begin the era of cutting taxes for the rich that apparently has not yet ended today.

I agree with the timing he suggests but I find other things about his exegesis puzzling. For example, he characterizes the Nixon presidency as “the high-water market of the regulatory state” and notes the efforts of banks and other businesses to gain advantage through lobbying and political contributions. Do they not see the connections between these two?

Those in a position to exercise such influence know with a certainty born of experience that it’s cheaper to buy politicians and regulators than it is to comply with regulation. A stronger regulatory state goes hand in glove with greater influence of big business. Not only is buying influence more cost effective than compliance, it’s an opportunity to prevent upstarts and beat down smaller competitors, inevitably much less able to wield the tools that established power brings.

In the light of this I ask a series of rhetorical questions:

1. Have they never heard of regulatory capture?
2. In the light of the intimate relationship between increased regulation and greater influence for big businesses why would they propose increased regulation as a means of dealing with bigger businesses?
3. What difference between the actions of the later Bush Administration and the early Obama Administration have driven them to conclude that there’s a marked difference between the two?
4. Why is this time different?

As I’ve said before here the reforms we really need are not increased regulation or more regulators but a different approach to regulation and different incentives for regulators. Barring that we can only see increasing concentration of power in Washington and in the boardrooms of the largest companies, reduced creativity, and a stagnating economy.