Welcome Nolan McCarty (Princeton Univ.) (Twitter), Keith T. Poole (Univ. of Georgia) (PoliticalBubbles.com) and Host Jeff Connaughton (JeffConnaughton.com) (Author, The Payoff: Why Wall Street Always Wins)

Political Bubbles: Financial Crises and the Failure Of American Democracy

On the big questions about our government’s performance in the lead up to the 2008 financial crisis and afterwards during the response, today’s guests believe our government blew it. Past administrations made errors of commission and omission that led to the crisis, and the Obama Administration failed to address its aftermath effectively. Government didn’t diagnose and treat the problems that led to the crisis, and it didn’t prescribe the right medicine after the convulsion. On these big questions, few at Firedoglake are likely to disagree with the good doctors of political science who are today’s guests. There’s blame enough to go around, the authors say, but “Wall Street should be nailed to the highest pole.”

Why, though, did government fail so egregiously? And why is every financial bubble preceded by a “political bubble” which allows and even abets the coming financial disaster? Their recently released book Political Bubbles suggests an analytical framework. Professors McCarty, Poole and Rosenthal stress the Three I’s: ideology, institutions and interests. They borrow a metaphor from economics and say the effects of ideology, interests and institutions are pro-cyclical. By political bubble, they mean a set of policy biases that foster and amplify the market behaviors that generate financial crises. Rather than counteract the actions of private economic actors, these factors complement and exacerbate their effects. The political bubble is an intrinsic part of answering what went wrong.

The authors state that “capture” alone is too simplistic, they believe it is “important to sharpen our understanding of exactly how financial interests are represented in Washington and when those influences will be the greatest.”

After 23 years in Washington – as a lobbyist, Clinton White House lawyer, and chief of staff to U.S. Senator Ted Kaufman during 2009-10 – I think I have a fairly sharp understanding of those questions. But this book added immensely to the depth of that understanding. As someone who lived through the Dodd-Frank debate, I thought the great value in this book is that it telescoped me back from the day-to-day, in-your-face, seediness of the political process and instead gave me a deeper context by packing a lot of information, history and argument into a well thought out framework. Every practitioner needs to step back and read objective analyses written by theorists who have thoroughly studied not just this financial crisis, but also past crises and the government policies that contributed to them and were passed in their wake. What are the patterns, the lessons learned and later forgotten?

Of course, the authors also account for the ugly realities of present day Washington. Political will to do the right thing has to swim against an onrushing tide of Wall Street contributions and the ever-present temptation to “monetize” public service. Where does belief in ideology end and the effect of green-colored glasses begin? Using former Senator Phil Gramm (who went on to make millions of dollars at UBS) as an example, the authors confess that, “Somewhat sadly, it can be difficult to disentangle the political influence of ideology from the influence of venality and greed.”

What happened after the 2008 crisis? Widespread illegality was left unpunished. Congress passed the Dodd-Frank Act, but that legislation only tinkered at the margins of the existing banking regulatory framework, left Wall Street banks structurally all-but-untouched, and for the most part kicked the can back to the very regulators who had failed to prevent the crisis in the first place. And since then the House of Representatives has passed bills that would partially unwind the derivatives deregulation in Dodd-Frank, Chairman Gary Gensler at the Commodities Futures Trading Commission has been thwarted from asserting cross-border swaps jurisdiction over derivatives trading at the foreign affiliates of U.S. banks, and the Federal Reserve remains under withering pressure not to impose even modest increases in capital and leverage requirements for systemically significant banks.

Welcome, Professors McCarty and Poole (Professor Rosenthal sends his regrets and could not join us today). Let’s dive in and explore your views on why our democracy is failing the interests of ordinary Americans.


[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. – bev]

Jeff Connaughton

Jeff Connaughton