In From The Cold

Over the weekend, the Financial Times reported on a story about a deal between the UK and European officials intended to bring the UK back in from the cold after the row over the fiscal pact late last year. This row had left the UK isolated with many accusing Cameron of sacrificing the UK’s relationship with the EU in order to defend his friends in the City of London.

As we argued then, the idea that continental Europe had finally liberated itself from the neoliberal anti-regulationist shackles of London finance was greatly over-done. This sentiment was a mixed bag of Euro-chauvinism and some false hopes placed in the socially progressive potential of the Sarkozy-Merkel alternative. However, what was striking was Cameron’s apparent willingness to alienate all his European peers. His break with the consensus was exactly the kind of actions that the EU is meant to guard against: as Perry Anderson has put it, in the EU any such kind of public disagreement is considered a serious breach of etiquette.

This is what makes the FT’s weekend story interesting. It reports that British and European officials discussed the possibility of swapping the portfolios of European Commissioners, bringing the Frenchman Michael Barnier over to foreign affairs and putting Baronness Ashton in Barnier’s place as Commissioner for the Internal Market. Barnier and Ashton would thus swap places in order that Cameron can reassure the City that at the person responsible for financial regulation in Brussels is the reasonable and compliant Cathy Ashton, and not the hard-headed Paris-backed Mr Barnier.

This story is good evidence of what has already been commented on at the Current Moment: the desire of the EU’s member states to remain part of the club, almost at any cost. Cameron was willing to have a public fight but his officials then worked behind the scenes to see what arrangement could be found. This desire to avoid exclusion has driven much of the UK’s policy towards the EU for some time: public protestations matched by private assurances and continued close relationships between officials and experts. This also tells us something about the nature of the Commission’s portfolios: rather than being themselves political offices, they are instead titles that can be traded in order to fashion a deal. As the FT put it, British officials were reportedly “handed Barnier’s head on a plate” by Commission officials hoping to bring Cameron round on the fiscal treaty.

The fiscal pact has been ratified in the absence of the British. But further down the line we will see the British government somehow assimilated into the European policy process and able to work the rules round so that they can accommodate British interests. That is the proper etiquette of the EU.

Towards a European Tobin tax?

Reports in the press this week suggested that German Chancellor, Angela Merkel, had been won over to the idea of introducing a tax on financial transactions at the European level.  This has been primarily a French idea so far, with Nicolas Sarkozy a convert to a policy he had previously dismissed as ridiculous. The Tobin tax idea had been taken up by the French anti-globalization movement at the end of the 1990s and early 2000s and was virulently opposed by most of France’s political class. Today, in a very different political climate, the idea has been given a new lease of life.

Whether or not a financial transaction tax is finally introduced remains uncertain. This week’s press also reported that Sarkozy – who faces an election in the coming months and has committed himself to this tax as a demonstration of his activism in regulating financial markets – might settle for a tax on share trading as a first step. This already exists in the UK in the form of stamp duty on stock exchange transactions. Keeping the UK on board with any new European regulations would be welcomed by other European leaders as lasting rifts and real isolation are anathema to the EU. Bringing Cameron back in from the cold would be attractive to all involved in last year’s falling-out between the UK and the EU. Such a tax would, however, leave unregulated all other kinds of financial trading like derivatives and high-frequency trades. These have been identified as the real targets but an initial tax on share trading might solve Sarkozy’s problem of having committed to introducing a financial transaction tax before the election.

Is a financial transaction tax really the solution to the current crisis? The main rationale for it today is that it would serve as an alternative source of revenue for bail-outs and other expensive public actions that have up until now been funded by the taxpayer. That such a tax could improve government balance sheets to the point of reducing the need for austerity seems rather fanciful. What it would challenge, however, is the idea that governments defer unconditionally to their financial sectors. Whilst governments routinely stand by and watch as industries relocate to the Far East and shed thousands of jobs, they seem unable to accept that any such “creative destruction” should operate in finance. To many, this smacks of double standards and a tax on financial transactions would demonstrate – at the very least – the exercise of some political muscle vis-a-vis banks and financial services.

This argument about the symbolic nature of such a tax is not a bad one. But it tends to miss the bigger picture. The reason why a Tobin-style tax has become a popular idea amongst European governments is that it is like the famous phrase of Tomasi di Lampudesa’s The Leopard: things must change so that they remain the same. There is nothing in a financial transaction tax that really challenges the relationships and interests that together have given us this debt-finance growth model of the last 40 years. Nor would the tax really reverse the striking rise in inequality that has come to characterise our societies. The theory of the present crisis of capitalism contained within the Tobin Tax idea is that responsibility lies in the financial sector and that whilst the economy is generally sound, a few bad financial apples are bringing us all down. By taxing them and redistributing the revenue according to priorities set by elected representatives, we can return to the status quo ante.

One argument we’ve been pushing at The Current Moment is that financialisation is as much about a change in the real economy as it is about the financial sector itself. Isolating finance from its place in the wider economy, as the idea of a financial transaction tax does, misses the nature of the problem. This idea is also naive in that it imagines that relationships between real people can be transformed via a state-levied tax. Societies, today as in the past, are based around relationships that can only be changed by real political struggle. There is no short-cut or easy way around the problem of either redistribution or of making European societies more productive. The financial transaction tax is a coward’s way out of tackling today’s economic and social crisis and will only entrench, rather than transform, existing inequalities.

A victory for the regulators?

One view of what happened at last week’s European Council summit is that we saw a struggle between neoliberal Anglo-Saxon capitalism and Europe’s alternative of a more regulated and people-friendly capitalism. David Cameron’s defence of the City of London’s banksters was in line with long-standing attempts to block European efforts at expanding the regulation of financial markets. That he failed, and that Sarkozy and Merkel struck a deal without Britain, is welcomed in this view as one step closer towards tackling the scourge of casino capitalism that has brought the Eurozone, and much of the global economy, to its knees.

There is lots wrong with this view of last week’s acrimonious summit negotiations. For a start, Cameron’s motivations were as much about avoiding a national referendum – and thus keeping his own Conservative –Liberal Democrat coalition alive – as they were about the City of London. The City itself is deeply divided over the issue of financial regulation: some would prefer to keep clear of European harmonization efforts and to go it alone (for a list of all the financial market reforms in the EU pipeline, see here). Others in the City say very clearly that a common European regulatory regime of which the City of London is a part would be better than a split. We should also have no illusions about the motivations of European financial regulators: the political push behind this regulation, led by the European Commissioner for internal market and services, the Frenchman Michel Barnier, comes from the French and the Germans and is driven by competition between national capitals. The goal is to weaken the City of London as a financial center as much as it is to reform European finance. Why side with one over the other in this struggle if not out of German, French or Euro-chauvinism?

Another major problem is to paint Sarkozy, Merkel and others national leaders as great representatives of a more social Europe. Regulatory change is about social and class power. Regulators, especially powerful ones, have huge amounts of discretion. The ends to which that discretionary power is put depends upon the wider social context of the regulation. Where Sarkozy and Merkel stand in this regard should tell us something about the promise of progressive financial market regulation. The development of their own economies has so far been in a decidedly anti-social direction and the recently agreed deal in Brussels cements this trend. This agreement enshrines in law the mistaken idea that fiscal expansion is the cause of the Eurozone’s crisis. In doing so, it gives Europe´s leaders a legal basis with which to pursue their austerity measures. Most of those measures are directly aimed at dismantling social protection in Europe: inter alia, rising retirement ages, cutting pensions, cutting public sector jobs, raising the cost of travel on public transport. These measures ignore the real basis of the Eurozone crisis: the stark unevenness of the national economies which make up the Eurozone. As Martin Wolf recently argued, the best predictor of the crisis in Europe was not government spending but balance of payments accounts.

Sarkozy and Merkel launch vicious attacks on the social conditions of the populations of peripheral Eurozone states, and strong arm their own populations into a decade of austerity measures, all in the name of a starkly lop-sided reading of the current crisis. And at the same time they portray themselves as progressive regulators, seeking to contain the untrammeled power of financial markets. Judged by developments so far, there is little reason to celebrate last week’s agreement as a victory for regulators over markets.

Regulation, Discretion, Democracy

Congress refuses to spend anymore but never fear, the Fed is contemplating a new round of quantitative easing and Obama is extending an (admittedly weak) administrative program to reduce housing debt. In a broad sense, what we are seeing is a familiar feature of crises – real or manufactured: the expansion of discretionary, especially executive, power. After all, who controls the deeply undemocratic Fed? A Fed able to undertake an entirely independent economic policy from actual apparatus of government. And while Obama has been reluctant to use executive power to put the squeeze on banks, improve financial regulation, and prosecute fraud, he too seems able to do a bit of an end-run around the slower, conflict-ridden legislative politics.

But more is at stake here than just a question of the relations between branches of government, or of the relations between elected officials and barely accountable bodies like the Fed. A second issue is the relationship between the daily practice of governing and democratic representation. Call this the representation game and the first one the discretionary power game. The first game tends to boil down to trying to limit and reduce the kinds of unchecked or arbitrary power exercised in the name of managing a crisis. That is an important project in a democracy, but it’s not the only one.

After all, modern states are currently saddled with an enormous administrative apparatus that cover a wide range of issues. The size and complexity of the modern economy, and the speed with which events take place unavoidably lead to the creation of administrative bodies like the SEC, FDIC, Treasury, and so on. To be sure, the specific bodies created, their formal authority, their composition, their mandate, are all a question of politics, not necessity. But it remains the case that governing in any particular area requires some kind of body that engages in the day-to-day activities of ruling, and this is almost never an activity of elected representatives themselves.

Again, representatives could be a lot better about congressional or parliamentary oversight, and about carefully crafting mandates rather than producing vaguely defined agencies with expansive regulatory powers. But to a degree, discretion will be built into the administrative apparatus. It cannot be eliminated.

This changes the democratic game, and shows us why movements like Occupy are important. The mainstream view is that the central democratic task is to elect representatives who will serve the public interest, or at least be responsive to the majority. And that democratic power is exercised by holding these representatives accountable for their actions. The anti-mainstream view, sometimes found in the Occupy movement, is that real democracy rejects representation and majority rule; instead, it is about direct participation and consensus. This debate misses a vital dimension of democratic self-government that goes directly to the management of the economy, and to questions of whose interests are served by the actual exercise of state power.

The missed dimension is how the actual governing apparatus – the regulatory bodies, the administrative agencies, the courts, the consultative groups, and other myriad authorities – uses its power, especially its discretionary power. Will it prosecute systemic fraud, use every measure it can to force banks to modify underwater mortgages, police banking practices, issue advisory and mandatory rules spreading risk fairly? Or will it try to force attorneys-general into weak settlements with banks and shovel fraud under the rug? As we have written before, the nature of a settlement on mortgage fraud is very important not just as a matter of immediate justice, but also of managing risk and future regulation. To a degree these regulatory outcomes depend on calculations about what will eventually happen at the ballot box – and thus on the familiar question of formal accountability. But even those electoral calculations depend on the current ability to mount pressure on the government. Those forms of pressure feed into predictions about what will happen electorally. And that latter power is a matter of social mobilization.

Moreover, the day-to-day contest over governing is also a matter of knowledge and ideas – specifically the knowledge and ideas that are in play, among the chattering classes, out in the public, and within the halls of power. Here again, social protest is part of transforming the kinds of ideas and the pieces of knowledge to which the state must respond. We have already seen the ability of the Occupiers to change national and international conversations. The power that movements like Occupy wield is always more nebulous because it has no formal, legal backing – it is not like a vote. But it is no less important for attempting to influence the ineliminably discretionary power exercised by administrative agencies. Constant social pressure and attention is probably the main way of securing a (more) democratic form of representation by these bodies, who are otherwise so easily influenced by powerful, wealthy interests.

To be sure, there are limits to this democratization of administration. At least from a democratic standpoint, it would be better if the Fed, or whatever lender of last resort there is, were more directly under public control. And there are agencies that it would be better to get rid of or slim down. Indeed, the dizzying array of agencies, and the simultaneous contraction of fiscal stimulus at the local, state and now federal level, alongside the expansion of (deeply regressive) monetary stimulus makes it difficult even to get clear on lines of responsibility and causal effects. But the apparatus of day-to-day self-government, especially when it comes to economic policy, will necessarily be administrative as well as legislative. Oversight, regulation, even just administration of the rule of law, are all exercised mainly by non-elected officials. Shaping the exercise of that power – so easily captured by those better able, and better financed, to operate in the halls of power – is one of the singular tasks of a social movement. Unresponsive representatives are not the only political agents that need whipping into line in a modern republic.

The limits of Vickers

To much fanfare in the British media, the Independent Commission on Banking, chaired by Sir John Vickers, published its final report this month. Its interim report, published in April, had already attracted a great deal of attention and debate. This last report would – according to the BBC’s ever-excitable business editor, Robert Peston – be “hated” by British banks and promised to be “possibly” the most radical shake-up of banking in the UK ever undertaken.

Some of the proposals in the report seem sensible and are improvements on the status quo. The main thrust of the report is about how to avoid UK taxpayers having to cover the cost of another financial crisis. By ring-fencing the retail part of a bank’s business, its investment activities are no longer meant to enjoy an implicit government subsidy (the result of bankers knowing that in a crisis the government will save the bank in order to protect savers). This would make it more expensive for banks to engage in investment banking activities but the Vickers-led commission rightly responded that this is only a case of making banks pay for the risks they are taking.

A few problems stand-out though, all to do with the role banking plays in the contemporary national and international economy. The idea of ring-fencing – which is a watered-down version of the more radical idea of dividing up banks entirely, investment banks on one side and retail banks on the other – might make some sense in theory but in practice it is difficult to see whether it would actually fundamentally change the way the government acts in a crisis. The investment arm of a bank might be expected to take a loss in line with its risky behaviour up to a point. But what if this would threaten the survival of a major British firm, dependent upon financing from a shaky investment bank? What if more than one major firm was threatened? Would the government not be obliged to intervene as before? The idea of ring-fencing rests upon the idea that investment banking exists in one sphere, the “real”, i.e. non-financial, economy in another. This is simply not true.

Another problem is that the report invests too much importance into identifying an ideal structure for the City of London. This suggests that if the institutional rules are the right ones, we will be free from future crises. Or, at the very least, the consequences of future crises will be severely constrained, unable to spill onto the innocent paving of Main Street. But there is little evidence to suggest that the structure of banking industries is the crucial variable in the ongoing financial and economic crisis. Today, debate rages around part-nationalization of French banks as shares of big French banks plummet. And yet French banking is different in many ways from the British banking industry. The smaller and regional Spanish cajas are also in great trouble today, with many suggesting they should be consolidated into a smaller number of bigger players, a move that would make Spain look more like… Britain. The issue doesn’t seem to be the structure of the industry as such but rather something deeper. To focus on banking reform is to present the structure of the banking industry as a main cause of the present difficulties and of the 2008 financial meltdown. Events since 2008 suggest that it is less cause than consequence.

A really radical move would be to trace in detail the causes of the 2008 crisis and the current global economic slow-down, situating the role of the banks within a broader study of a financialized global economy.

A response on financialization

In comments on a recent post on financialization, a number of criticisms were raised that are worth exploring further. Readers have reasonably objected that a graph showing increased financialization of the US economy demonstrated less than first appears. These objections break down into at least four claims:

1. Finance has been a part of modern economies for ages, and a major part at least since the late 19th century, what’s so different now?

2. To the degree there is something new, isn’t it a product of increasing complexity and thus a further refinement of the division of labor?

3. The financial class is really the only group that understands the ins and outs, and thus the stakes, in various regulatory and private decisions regarding this area of economic activity. There are experts, and only experts have the competence to make informed decisions. It’s either the experts or the Tea Party, you decide.

4. If there are other interests at stake, what exactly are those interests, and how are they articulated in the particular case of, say, financial regulations? All that has been said on this blog so far is some vaguely democratic stuff about general interests.

We agree that these are important issues, but cannot respond to all of these objections at once. Question 1 is for separate posts. Suffice to say we think something distinctive has happened since the 1970s in national and global finance (one thing being the more global character of finance). These trends are importantly different from, say, the period from 1870-1914 that gave rise to concepts like ‘finance capital’ and ‘monopoly capital.’

Questions 2 and 3 go together. It is misleading, in our mind, to view the current financial architecture as a kind of natural development of the division of labor and economic complexity. Current markets are the product of a host of conscious political decisions, especially regulatory and de-regulatory choices. One could choose any number of examples, but few recent ones include the Gramm-Leach Bliley Act (1999), which eroded the boundaries between investment banking, commercial banking, and insurance provision; and the 2004 SEC decision to raise debt-to-capital ratios. These decisions significantly altered the structure of financial markets, allowing for certain kinds of financial ‘innovation,’ which it must be said many people even in finance don’t seem to have understood. So the structure of financial (and all economic) markets is the product of the laws the institute them, and the incentives these create.

A further reason we have doubts about the expertise argument is that everything suggests that they have not been using this expert knowledge in the public interest, but rather to their private interest.  As we have noted on this blog before, dramatic rises in incomes at the top over this period have gone hand-in-hand with stagnating real wages and rising consumer debt. It would seem one of the most significant elements of financialization has been its distributional implications, not the improved risk management or allocation of resources. Put another way, there is no reason after this crisis to particularly trust the experts!

Which brings us to our response to question 3: people might not understand everything, but they can understand enough. That is to say, not only is it misleading to view the growth of finance as a natural development of economic complexity (question 2), but it is also wrong simply to say these market are too complex for most people to understand (question 3). True, most people can’t be expected to know about or even understand the ins and outs of Tier 1 capital ratio requirements, or the kinds of collateral required for overnight repo agreements. But that does not mean a) they cannot be given better information, and get better educated than many are now (see, for instance, well-known misperceptions about inequality) and b) that they cannot know their own interests and c) that they cannot be organized on the basis of these interests to put pressure on their government to better serve them. Echoing one of the commentators on this blog, we would say the greater problem is not the people’s incompetence, but rather their relative apathy. The popular response to this crisis - Tea Party aside - has been decidedly tepid. But when representatives and regulators fear they will lose their jobs, or worse, they tend to do at least a better job of keeping the worst at bay. Or put another way, as plenty of post-crisis evidence has suggests, the problem was not the lack of knowledge amongst regulators, but a willingness to look. That is not a problem of incompetence v. expertise, but a political problem. One suspects they look harder when there is more popular pressure on the government. But now we are talking about things like social movements and popular protests, which are too quickly written off as the noise of incompetent mobs.

One final point. Question 4 was about what kinds of regulations and economic structures would be more in the public interest. Not just who are we talking about, but concretely what are their interests? If financialization has been generally bad, what is the proper response? That is a harder question, though it is easy enough to start by saying most people do not have an interest in more tax cuts for the wealthy and more spending cuts in social services. That, however, is only one part of the question and does not directly address how to respond to financialization itself. This is a question we do not ourselves have clear and complete answers to, but we are confident enough to say that we have no confidence in our existing rulers, or current experts, to solve those problems.

Obama and Financial Regulation

Over at Naked Capitalism, Yves Smith reposts an argument that, early in Obama’s administration, there was a “crucial window of opportunity” to seize on popular discontent and regulate the financial industry in a way that could have reduced the systemic risks that brought the economy to its knees. Instead, “Obama failed to act” and, even more problematically, turned to what appears rather disturbingly to be a propaganda campaign to promote his non-reform. The propaganda pivots on what Smith deems the “Theory of Positive Thinking,” or the theory that, so long as everyone’s expectations are optimistic, the market will continue to grow. The real economy doesn’t work that way, but Obama chose this path.

Smith’s indictment is powerful, but it under-estimates the magnitude of the problem involved in re-regulation. We are the last to let Obama off the hook, and he has received too many passes from supporters who think that, deep down, there is some kind of lefty who is simply stymied by the limits of American politics. In that argument, the wish is father to the thought. However, in the case of financial regulation, it is worth recalling some of the reasons why the issue can’t be reduced to the political will of a president willing to seize on the very amorphous and contingent discontent of the public.

First, it’s worth recalling that loosening the reins on finance and promoting the expansion of credit (especially mortgages), through low interest rates, Clinton’s decision to allow Fannie Mae/Freddie Mac to finance sub-prime mortgages (1995), de-regulations like the Gramm-Leach-Bliley Act (1999), Commodity Futures Modernisation Act (2000), and the 2004 SEC decision to raise debt-to-capital ratios, were all part of a particular kind of social compact. Various observers have noted that financialization of the American economy begins to pick up just as real wages begin to stagnate in the mid-1970s. Here is a graphic on stagnating wages:

Compare with various figures showing starting in the late 1970s. The Economist, for instance, observes that consumer debt went from 100% of household income in 1980 to 173% in 2009. Basically, the post-1970s downturn social model was to keep consumption levels high through the expansion of credit, rather than by maintaining the ability of workers to compete for their share of the actual social product. (It’s no accident that unionization and strikes – key methods for keeping wages and benefits high – have declined). For this kind of expansion of credit, especially in key areas like home loans and credit cards, de-regulation was required, not to mention lax oversight and a general social willingness to allow bankers to play.

To be clear, this is not a point about fairness, social justice or any other kind of moral judgement about whether this was a good way of dealing with the crises of the 1960s and 70s. It’s just a point about the way the actually existing accord appears to have worked. The upshot is that re-regulation implies a kind of transformation of American society not just the economy. It would require making a decision to go for a different kind of accord between the various interests in society, and that is not something that Obama can manage single-handedly. It’s evident he doesn’t have the stomach for even the first baby steps. The Employee Free Choice Act is tabled, Obama wants to talk about stock markets not job markets, and nobody wants to talk about real wages.

On top of everything, even if someone decided to tackle the problem of coming up with a different kind of social model, there are the global imbalances that would also have to be managed. An excellent paper by Anush Kapadia and Arjun Jayadev reminds us that the difficulty in dealing with the financial meltdown comes from the overlapping layers of financialization and risk. Over the past decade, what has made possible low interest rates, cheap consumer goods, and thus debt-financed consumption are ‘global imbalances,’ or the way the Chinese have suppressed their own financial markets, instead cycling their profits into US T-bills. This keeps the dollar strong relative to the renminbi, and allows the US to run trade deficits (alongside Chinese trade surpluses). Here again, balancing out this dynamic would involve some development of Chinese financial markets, alongside higher domestic consumption in China, and meanwhile higher American savings and investment, but lower consumption. It’s hard to imagine a move like that, especially a globally coordinated one, especially given the implications that would have for the already struggling majority of Americans.

So, in sum, Smith is certainly right to point to the abject failure of leadership by Obama and the Democrats, especially in the early post-election days when there was indeed some kind of critical juncture, or at least minimal opportunity. Even in the small window available to them, the Democrats took conservative options. And the major strategy seems simply to be to kick the can down the road. But it’s also important to note the magnitude of the social and political problem, because it means the fight to craft a new order will involve some major major losers and winners. In that battle, it’s going to take more than amorphous public opinion to overcome well-organized interests.

The Problem of a Financial Class

Gillian Tett commented today on the growth of the ‘shadow banking‘ sector in relation to regulated banks. Tett’s anecdotal evidence suggests that shadow banking – basically those unregulated banking-like activities by hedge funds, investment vehicles, and other bodies – is not just growing but colonizing areas that regulated banks used to dominate. The reason is that Dodd-Frank only regulates the already regulated banks, like Citibank, which means it has become harder, more expensive, or just impossible to engage in certain financial transactions. While these shadow banks claim that this is all ok because they are responsive to investors, that is not particularly comforting by any stretch.

Tett seems worried but, somewhat oddly, her conclusion is that, if these shadow banks turn out to be just as bad the second time around, we might end up seeing this period as “(yet another) lesson in the unintended consequences of regulatory reform.” This is hardly the obvious conclusion. This sounds like the classic ‘perversity’ thesis – all attempts at regulation (or any political action) will produce the opposite or worse unintended results than the intended ones. Plenty of people noticed, during the debates over the Dodd-Frank bill, that if shadow-banking activities were not also brought into the light and regulated, then the regulations would be woefully inadequate. There is nothing unexpected about this emerging problem.

However, it does highlight an underlying problem with the political assumptions of the liberal model of regulation. Many liberal arguments during the debate over financial regulation were about how ‘if we just get the regulations right’ – or even, ‘if we just go back to the Glass-Steagal acts’ – then we can solve the problem. But the idea that we just had to figure out the right regulations fails to grasp the kind of struggle that would have been involved in a full scale regulation of the financial industry. Compared with the New Deal, and even the post-war boom period, the financial class today is much more powerful and influential. And serious regulation of finance would undoubtedly have imposed a dramatic constraint on the activities that have allowed the financial class to grow. It may very well have meant the shedding of far more financial jobs than have been shed, and permanently restructuring the activities of those who remained.

In other words, serious regulation would have required a full on assault on the financial class. I don’t think just a little bit of public reasoning about the ‘right regulations’ would have won financiers over. This would have required a kind of class war, at least in the sense of one well-organized, politically powerful set of interests would have had to defend and put its political muscle behind these regulations.

It is precisely those conditions that are absent. No amount of clever policy-wonkery can address those background problems. Worse yet, thinking about the problem as merely one for a bit of wonkery misses out on the political economy of something as seemingly remote and boring as financial regulation. Regulators and elected officials did not just ‘make a mistake,’ they played the only game in town.