The Politics of Financial Regulation and the Regulation of Financial Politics: A Review Essay
Levitin, Adam J., Harvard Law Review
II. FINANCIAL POLITICS
This Part of the Review Essay considers the challenge the financial crisis of 2008 presents to the current system of technocratic regulation by independent agencies. Simply put, the system failed. The question is: "Why?"
Two basic explanatory narratives have developed, as reflected by the books discussed above. The first narrative sees the crisis as the result of a financial system guided by outmoded regulation and struck by a "perfect storm." The solution this narrative suggests is discrete regulatory updating, and indeed this solution has been the major regulatory response to the crisis.
The second narrative sees the root of the crisis in a captured regulatory system. Regulators had sufficient tools to prevent the crisis but failed even to try to use them and, in fact, exacerbated the crisis through agency-driven deregulation. This capture narrative suggests three basic, if potentially conflicting, regulatory approaches: giving up on technocratic independence and making financial regulation more democratically responsive; redesigning the regulatory system to better insulate regulators from political pressure; and harnessing the rent-seeking impetus of competing interest groups to produce symmetrical and offsetting political pressures that create space for more neutral, technocratic policymaking. This Part explores in turn these various approaches, their manifestations in post-crisis regulation, and their promises and limitations.
A. The Challenge of 2008 and Its Lessons
In the United States, most financial regulatory policy is carried out by independent agencies. The purpose of agency independence is to free policymaking from political interests, allow it to be set in reliance on objective scientific facts, and avoid the delays and distortions of politics. (224) The contours of the independent agency were shaped by Progressives and New Dealers, who believed that the traditional tripartite political system had come to be dominated by moneyed business interests. (225) Legislatures were not properly aggregating societal preferences because of the undue weight given to concentrated financial interests. (226) Similarly, common law courts failed to ensure proper policy because they tended to protect existing distributions of wealth and power. (227)
New Dealers envisioned technocratic regulatory agencies as the antidote to the power of white-shoed titans of industry. The unshackled technocratic power of expert administrative agencies would produce a new age of government freed from the corrupt politics of the legislative system. (228) Thus, the creation of New Deal independent agencies like the SEC, the FDIC, the Federal Home Loan Bank Board (the OTS's predecessor), and the remade Federal Reserve Board was an attempt to change financial regulation and monetary policy from a political system to a scientifically guided one (which Progressives naturally assumed would result in the very policies they favored). Although the current regulatory system includes a pre-New Deal agency (the OCC) and a trio of post-New Deal agencies (the CFTC, the Federal Housing Finance Agency, and the National Credit Union Administration), the basic financial regulatory structure is a New Deal legacy. Since the New Deal, there has been significant criticism of the conceit of agencies operating in an apolitical space, (229) but the idea that independent agencies liberate neutral, technocratic policymaking from the corruption of the political process still drives the contours of the regulatory system.
The financial crisis of 2008 represents a serious challenge to the ideal of a politically insulated, technocratic administrative agency. A regulatory system created under years of technocratic oversight collapsed in spectacular fashion, leaving technocrats bewildered and even panicked. (230) The result was, for many, a crisis of faith in the financial regulatory system and its underlying claims to technocratic or scientific expertise, as evidenced by two populist political movements emerging largely in reaction to the financial crisis: the Tea Party and the Occupy Wall Street movement. …