The Politics of Financial Regulation and the Regulation of Financial Politics: A Review Essay
Levitin, Adam J., Harvard Law Review
INTRODUCTION I. FINANCIAL RASHOMON A. The Central Banker B. THE ESTABLISHMENT ECONOMIST C. THE BANK REGULATOR D. THE PROSECUTOR E. THE LOBBYIST F. THE PROFESSORS II. FINANCIAL POLITICS A. THE CHALLENGE OF 2008 AND ITS LESSONS 1. THE PERFECT STORM NARRATIVE 2. THE REGULATORY CAPTURE NARRATIVE B. RESPONSES TO CAPTURE 1. DEMOCRATICALLY RESPONSIVE FINANCIAL REGULATION 2. REFORMING THE REGULATORY ARCHITECTURE TO MITIGATE CAPTURE 3. HARNESSING RENT-SEEKING TO NEUTRALIZE POLITICS CONCLUSION
THE BANKERS' NEW CLOTHES: WHAT'S WRONG WITH BANKING AND WHAT TO DO ABOUT IT. By Anat Admati & Martin Hellwig. Princeton, N.J.: Princeton University Press. 2013. Pp. xv, 398. $29.95.
BULL BY THE HORNS: FIGHTING TO SAVE MAIN STREET FROM WALL STREET AND WALL STREET FROM IT SELF. By Sheila Bair. New York: Simon & Schuster. 2012. Pp. viii, 415. $16.00.
BAILOUT: HOW WASHINGTON ABANDONED MAIN STREET WHILE RESCUING WALL STREET. By Neil Barofsky. New York: Free Press. 2012. Pp. xxvi, 272. $16.00.
THE FEDERAL RESERVE AND THE FINANCIAL CRISIS. By Ben S. Bernanke. Princeton, N.J.: Princeton University Press. 2013. Pp. vii, 134. $19.95.
AFTER THE MUSIC STOPPED: THE FINANCIAL CRISIS, THE RESPONSE, AND THE WORK AHEAD. By Alan S. Blinder. New York: Penguin Press. 2013. Pp. xix, 476. $29.95.
THE PAY OFF: WHY WALL STREET AL WAYS WINS. By Jeff Connaughton. Westport, Conn.: Prospecta Press. 2012. Pp. viii, 277. $24.95.
The financial crisis of 2008 was the first truly systemic and acute crisis to occur against the backdrop of the modern regulatory state. The panic of 2008 tested the modern financial regulatory system as it had never been tested before. How did the financial regulatory system fare? Did the regulatory system work before and during the crisis? Is the system basically sound, needing only minor reforms? Or does the crisis bespeak a more profound problem in financial regulation?
The answers to these questions have far-reaching implications. In the modern, financially intermediated economy, the regulation of financial markets impacts the economy as a whole. Financial regulation affects the aggregate amount and distribution of wealth in society. Do we trust the institutional structures and processes for ordering the financial marketplace to produce normatively acceptable distributional outcomes? Does the process have sufficient legitimacy to support its distributional effects?
The question of faith in the regulatory system as a means of economic ordering has animated American politics following the financial crisis. Both the Tea Party and Occupy Wall Street movements are sharp repudiations of the financial regulatory system as failing to produce normatively acceptable distributions of wealth in society.
The question of faith in the system also underlies and permeates virtually the entire literature about the financial crisis, as shown by titles such as In Fed We Trust (1) and Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation. (2) In the five years since the crisis, a small literature has emerged on its causes, the government response, and potential reforms. Much of this literature has been in the form of journalistic accounts of either the run-up to the crisis or the government response to the crisis, sometimes with concluding policy proposals. (3) More recently, we have begun to see academic examinations and insider accounts. (4) These accounts tend to either lionize bank regulators as the expert heroes who staved off financial Armageddon or criticize them for the political priorities reflected in their decisions before and during the crisis. The former narrative extols regulatory independence, while the latter urges political accountability. These narratives also reflect a difference in priorities regarding banks and the real economy or, in shorthand, Wall Street versus Main Street. …