Financial Lobbies and State Capture (or why IPE is now so much fun)

11 February 2010, 1703 EST


I liked Virginia Haufler’s post on Canadian Banks, and in a related vein wanted to point out some interesting research on lobbying by the financial industry in the US. In a brief about their latest research posted on VOX EU, Deniz Igan, Prachi Mishra, and Thierry Tressel, three IMF economists, basically conclude that the US financial industry has lobbied its way out of regulation.

They note:

“The Lobbying Disclosure Act of 1995 requires lobbying firms and companies with in-house lobbying units to file reports of their lobbying expenditures with the Secretary of the Senate and the Clerk of the House of Representatives. Legislation requires the disclosure not only of the dollar amounts actually spent, but also the issues in relation to which the lobbying is carried out.
By going through individual lobbying reports, we identify all lobbying activities by financial institutions related to the regulation of mortgage lending and securitisation. During the period of the boom from 2000 to 2006, we find 16 pieces of federal legislation aimed at enhancing the regulation of predatory lending practices, none of which ever became law. The amounts spent on lobbying in relation to these laws were substantial and were spent mostly by large financial institutions.”

Further, they find that:

“financial institutions lobbying on specific issues related to mortgage lending and securitisation adopted significantly riskier mortgage lending strategies in the run-up to the crisis.”

This research is a good complement to Simon Johnson’s earlier piece “The Quiet Coup” in The Atlantic online, May 2009. In that piece, Johnson argues that:

“the finance industry has effectively captured our government — a state of affairs that more typically describes emerging markets and is at the center of many emerging market crises.”

The lobbying continues now, as an opinion piece by Elizabeth Warren in the Wall Street Journal on February 9 notes:

“President Obama’s proposals for reform are bottled up in the Senate. The same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the president’s proposal for a Consumer Financial Protection Agency (CFPA).”

I’ve been researching global financial regulatory reform (or lack thereof) and teaching IPE, and I am finding that studying IPE today is way more exciting than it once was. There are so many crazy things going on, so many changes, and so much political maneuvering and battle over ideas (Keynes vs. Hayek anyone?) that even the dullest of rational choice theorists and neo-liberal institutionalists cannot kill the fun. One interesting irony is how much of the analytical framework once used to primarily study developing country economies, with its preoccupation with corruption, unsustainable spending, state capture, debt crises, etc., is now applicable to many of the OECD countries! Maybe we’re all developing countries now.