mccarty et al - political bubbles; financial crisis and the failure of american democracy (2013)

Political Bubbles m m m m m m m m m m m m Political Bubbles Financial Crises and the Failure of American Democracy m m m m m m m m m m m m Nolan McCarty Princeton Universit y Keith T Poole Universit y of Georgia Howard Rosenthal N e w Yo r k U n i v e r s i t y Princeton University Press Princeton and Oxford Copyright © 2013 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu Jacket designed by Marcella Engel Roberts Illustration composite by Marcella Engel Roberts using stock diagram © Pincasso; Capitol building, Washington DC © Orhan Cam; and bubbles © Marcel Jancovic Jacket photographs courtesy of Shutterstock All Rights Reserved Library of Congress Cataloging-in-Publication Data McCarty, Nolan M Political bubbles: financial crises and the failure of American democracy / Nolan McCarty, Princeton University, Keith T Poole, University of Georgia, Howard Rosenthal, New York University p cm Includes bibliographical references and index ISBN-13: 978-0-691-14501-3 (cloth : alk paper) ISBN-10: 0-691-14501-6 (cloth : alk paper)  1.  Global Financial Crisis, 2008–2009—Political aspects.  2.  Financial crises—United States—History—21st century.  I.  Poole, Keith T.  II.  Rosenthal, Howard, 1939–  III.  Title HB37172008 M34 2013 330.97390931—dc23  2012041583 British Library Cataloging-­n-­ ublication Data is available i P This book has been composed in Sabon Printed on acid-­ ree paper ∞ f Printed in the United States of America 1 3 5 7 9 10 8 6 4 2 Contents Acknowledgments vii Introduction 1 Part I: The Political Bubble Why Washington Allows Financial Crises to Occur Chapter Bubble Expectations  31 Chapter Ideology 38 Chapter Interests 71 Chapter Institutions 90 Chapter The Political Bubble of the Crisis of 2008  117 Part II: Pops Why Washington Delays in Solving Financial Crises Chapter Historical Lessons of the Responses to Pops  153 Chapter The Pop of 2008  184 Chapter “Pop”ulism 228 vi  •  Contents Chapter How to Waste a Crisis  251 Epilogue 275 Notes 283 Bibliography 305 Name Index  327 Subject Index 333 Acknowledgments At the close of our last book Polarized America: The Dance of Ideology and Unequal Riches, we speculated about what might end the cycle of economic inequality and ideological polarization that the United States had witnessed over the past thirty years Having carefully ruled out all the “small ball” solutions (e.g., open primaries, gerrymandering reform, campaign finance reform), we tried to go deep One of the scenarios we laid out was a political realignment engendered by a financial crisis such as that of the 1930s, which ushered in the transition from a laissez-­ aire political economy to the New Deal f We were chided by a few colleagues who found us unduly pessimistic Surely the system could be changed short of financial calamity And when the crisis did occur, the smart set was convinced that hope, change, and a new politics had arisen from it But history has proven the conclusions of Polarized America to be downright Pollyannaish We had our crisis, but we didn’t get much for it This book aims to try to explain why we got so much right in Polarized America (or at least we think so) but got the conclusion so wrong This book was greatly improved by comments on our first draft from Adam Bonica, Patrick Bolton, Charles Cameron, Jean-­aurent Rosenthal, Joshua Thorpe, Chris Tausanovich, L two readers for Princeton University Press, and an economist who wished to remain anonymous Barry Sacks helped on the Employee Retirement Income Security Act We also thank Tom Romer, who has been our excellent colleague at Carnegie Mellon viii  •  Acknowledgments and Princeton Universities for many years Several ideas in this book were worked out when we collaborated with Tom on a 2010 article published in Daedalus (and a cheeky op-­ d about e Russ Feingold in the Huffington Post) None of these people is likely to be in complete agreement with the views we express As nonideologues, we welcome debate Nolan McCarty would like to thank seminar participants at Princeton’s Center for the Study of Democratic Politics for feedback on an early version of the book’s arguments Participation in a Russell Sage Foundation–­unded collaboration on f political responses to the crisis, headed by Nancy Bermeo and Jonas Pontusson, provided a large amount of feedback as well as the opportunity to write the first draft of the case studies on the economic stimulus plan and the Dodd-­ rank Wall Street F Reform and Consumer Protection Act McCarty’s discussions with Dan Carpenter, David Moss, and other participants in the Tobin Project on Regulatory Capture were very helpful in shaping the discussion of the politics of financial regulation Keith T Poole would like to thank his colleagues Scott Ains­ worth, Jamie Carson, and Tony Madonna for many useful conver­ sa­ ions about the manuscript He also received valuable feedback t from students in two graduate courses and an undergraduate course on political polarization Howard Rosenthal’s interest in the political economy of finance came about from visiting the European Center for Advanced Research in Economics and Statistics (ECARES) in Brussels in 1995 He had an exceptional group of colleagues, most notably Erik Berglöf, Patrick Bolton, Mathias Dewatripont, Ailsa Röell, and Gérard Roland Berglöf realized that bankruptcy policy was historically a divisive political issue in the United States An investigation of what could be learned about the conflict from roll call voting analysis was made possible by the DW-­ NOMINATE model that we had developed Gérard Roland and Abdul Noury, the latter then an ECARES student, began to use NOMINATE to study the European Parliament and wound up writing, with Simon Hix, a book that won the Richard F Fenno, Acknowledgments  •  ix Jr Prize from the Legislative Studies Section of the American Political Science Association Playing off the joint work with Berglöf, Bolton and Rosenthal later wrote “Political Intervention in Debt Contracts,” a paper that provides a rationale for government relief of debtors even in the shadow of moral hazard The Bolton-­ oland model of taxation was later used as a theoretical R framework for our analysis of the politics of redistribution in Polarized America The stop at ECARES was a career changer for Rosenthal Patrick Bolton deserves special thanks He was an organizer of the meeting “Preventing Future Financial Crises” at Columbia University in December 2008 When the program was put together months before, no one realized that the American financial system was near collapse Bolton asked Rosenthal to make a brief presentation on the politics of the crisis Discussions after the conference led us to write Political Bubbles As the book evolved, Bolton was always available to provide an economist’s reality check to a trio of political scientists In 2011–­ 2, Bolton served as the first director of the Institute for Applied Social Science in Toulouse, France He invited Rosenthal to give two talks drawn from the book manuscript We thank those who were in attendance for numerous comments that influenced the revised manuscript Between the Columbia meeting and the Toulouse talks, Rosen­ thal was also able to present themes from the book as a plenary address at a political economy conference at Università Cattolica in Milan, as the William H Riker Prize Lecture at the University of Rochester, and at the Priorat Workshop in Theoretical Political Science in Falset, Spain Participants, particularly Larry Rothenberg and Guido Tabellini, are thanked for their comments In ad­ dition to academic colleagues, Rosenthal owes a great deal to the undergraduate honors students who have taken his seminar Politics and Finance at New York University since 2006 Rosenthal would also like to thank Luca Bocci and Nadia Bolognesi, who for the past thirteen years have provided a country home in Piemonte where a good deal of the work on both 342  •  Subject Index Gore, Albert, 5, 178 government regulations, of food and drug industries, 282 Gramm, Phil: connections to UBS, 277; deregulation and, 41, 73; as political advisor, 12, 183; private sector and, 183; self-interest and, 17–19 Gramm, Wendy, 17–18, 75, 183 Gramm-Leach-Bliley Act of 1999, 18, 34, 41–42, 143, 147, 272 See also Glass-Steagall Act (Banking Act) of 1933 Great Depression: credit markets and politics in historical context and, 157, 159, 295n10; delays in policy response and, 11, 161–63; financial industry in context of politics and, 162; government housing programs and, 128; legislation after, 11, 161–63, 291n29; policy responses to, 19–20, 40–41, 165; transitions of power and, 177 Great Recession of 2007 to 2009, 2, 6, 104, 118, 177, 228, 251, 272 greed See self-interest Greenspan, Alan: delays in policy response and, 109; Fed chair appointment of, 42, 286n15; financial innovation and, 34; free market conservatism and, 16, 41–43, 286n12; limited policy responses and, 172; political bubble of crisis of 2008 and, 118; political reasons for crisis of 2008 and, 5; regulatory capacity and, 123; self-regulation and, 27, 41; “too big to fail” and, 265 See also Federal Reserve gridlock (paralysis): crisis of 2008 and, 60–61; financial bubbles and, 17, 59; gridlock interval and, 100–103, 103, 291nn23–24; institutions’ regulatory responses and, 91, 94, 96, 100–101, 109–12, 290n15, 290n21, 291nn23–24, 292n46; pop of 2008 and, 102 GSEs (government-sponsored enterprises), 3–4, 255–56; future of and, 276; post-election, 281 See also Fannie Mae; Freddie Mac Hamilton, Alexander, 16, 159 HAMP (Home Affordable Modification Program) of 2009, 189–90 HARP (Home Affordable Refinance Program) of 2012, 190 health care industry: health care reform and, 181, 241, 241–43, 252; lobbyists and, 290n30; Obamacare of 2010 and, 102, 230, 241, 243–45, 247, 259; OWS and, 249; populist responses to laws on, 297n49; power of interests and, 76, 77; reforms in, 48, 181, 195–96, 241, 241–43, 250, 251–52; regulations and, 142–43; regulation versus deregulation and, 134, 135 high-frequency trading (HFT), 276 Hispanics, 118, 119 HOEPA (Home Ownership and Equity Protection Act) of 1994, 216 Holbrooke, Richard, 2223, 7374, 118 Hollande, Franỗois, 280 Home Affordable Modification Program (HAMP) of 2009, 189–90 Home Affordable Refinance Program (HARP) of 2012, 190 homeownership: summary of, 117–18, 119, 190; bankruptcy and, 158, 166; credit markets and politics in historical context and, 157–59; deregulation and, 137–39, 294n30; egalitarianism Subject Index  •  343 and, 19, 44, 126, 128–29, 292n6; equity and, 2, 28; financial innovation and, 140–42; free market conservatism and, 43–44; Great Depression and, 128; income tax deductions and, 127; institutions and, 131–32; interests of real estate industry and, 126–28, 131, 292n6; minorities and, 43, 44, 117, 118, 119, 130, 148; off-budget subsidies and, 126–33; “ownership society” and, 5, 44, 126, 129, 143, 231, 293n13; the poor and, 5, 45, 137, 143–44, 218; predatory mortgage lending and, 141; private sector and, 126; redlining and, 130, 148; securitization and, 8–9; state governments and, 13, 127, 137, 139, 141 See also foreclosures; mortgages; political bubble of crisis of 2008; predatory mortgage lending; specific mortgage products Home Ownership and Equity Protection Act (HOEPA) of 1994, 216 Hoover, Herbert, 40–41, 57, 153, 161, 162, 167, 177 Housing and Community Development Act of 1992, 130, 148 Housing and Economic Recovery Act of 2008 See AHRFPA (American Housing Rescue and Foreclosure Prevention Act) of 2008 housing bubble, 275–76; summary of, 1–3, 35, 286n12; equity and, 28; financial innovations and, 5, 9–10, 13; ideology and, 215–21; liberal-conservative politics and, 218–21, 219, 300n62; pop of, 9–10, 33, 215–21; predatory mortgage lending and, 193–94, 216–17, 299n59, 301n21; psychology of decision making and, 33 See also real estate industry HSBC, 277 ideal points, 48, 52, 53, 54, 62, 65–70 See also ideology scores ideology: summary of, 38–45; behavioral definition of, 45; capitalism and, 40; crisis of 2008 and, 228; crony capitalism and, 67; definition of, 38, 39, 45; delays in policy response and, 43, 154; Democratic Party and, 39–40; financial bubbles and, 16; free market conservatism and, 40, 41, 42–43, 286n12; impact of, 280; limited regulations and, 154; moral hazard and, 42–43, 57; opportunities for reform and, 257, 269–70; OWS and, 249; partisan overlap and, 50, 52, 98; polarization and, 47, 50, 53, 54, 57–62, 58, 61, 288n37; policy response and, 40–41; political bubble of crisis of 2008 and, 118, 123; political bubbles and, 15–16, 18–19, 284n22, 284n33; political reasons for crisis of 2008 and, 7–8, 29, 283n7; political responses and, 150–51; pop of 2008 and, 39–40, 57, 67, 196–98, 215–27, 219, 224–25, 226, 227; Republican Party and, 39–40, 279; reversals of power and, 179; self-regulation and, 41, 42, 286n12; tracking techniques and, 69, 288n48; Wall Street and, 27, 113, 124 See also ideal points; liberal-conservative politics; specific ideologies ideology scores: Bernanke’s reappointment to Fed and, 208, 228–29, 229, 299n42; Democratic Party and, 163; liberal-conservative 344  •  Subject Index ideology scores (continued) politics and, 47–49, 52–58, 53, 54, 61, 69, 288n48; pop of 2008 and, 190–94, 192, 193, 297nn14–16, 298n17; Republican Party and, 163 See also ideal points; ideology ignored information, and crisis of 2008, 12–13, 156, 208, 258–59, 272 inaccurate information (misinformation), 5, 12–13, 25, 36, 239, 262–63, 284n15, 284n17, 303n9 income tax code, 277–79 institutions, 280; summary of, 90–94, 115–16; authority in government and, 91; cloture rules and, 98–100, 102–4, 290n19, 291n27; cognitive regulatory capture and, 115, 225; courts and, 107–9; crisis of 2008 and, 228; crisis of 2008 in context of, 28–29; delays in policy response and, 91, 94, 109, 154; electoral cycle and, 91, 290n1; filibuster and, 98–100, 102–4, 103, 291nn27–28; financial bubbles and, 16–17; geographical representation and, 92–94, 290n9; gridlock and, 91, 94, 96, 100–101, 109–12, 290n15, 290n21, 291nn23–24, 292n46; gridlock interval and, 100–103, 103, 291nn23–24; homeownership and, 131–32; limited policy responses and, 150; limited regulations and, 154; localism and, 91–92, 136–37; negative agenda control and, 96–98, 97, 102, 290n15; pivotal politics and, 94–100, 97, 105, 111; polarization and, 90, 104, 110–11; political bubble of crisis of 2008 and, 118, 123; political bubbles and, 16–17; political reasons for crisis of 2008 and, 7, 8, 29, 283n8; political responses and, 150–51; power of federal government and, 91–92, 94, 96, 100; power of regulatory agencies and, 108–9, 114; power to block reforms in homeownership and, 131–32; presidential formal/informal legislative powers and, 100, 290n20; presidential pocket veto and, 94, 100; presidential veto and, 100–105, 103, 290n21; reform trap and, 114; regulatory capacity and, 112–15, 292n52; regulatory responses and, 20, 111–12, 292n46; reversals of power and, 179; strategic disagreement and, 105–7; weak regulations and, 20, 139 insurance industry, 77, 78–79, 81–82, 82, 290n30; campaign contributions and, 277; risk, 281 See also specific companies interests: summary of, 71–75; crisis of 2008 and, 27–28, 228; delays in policy response and, 154; entitlement changes and, 280; within Fannie Mae, 132–33, 293n22; financial innovation and, 140–44, 294n34, 294n38; within Freddie Mac, 132–33, 293n22; information from lobbyists and, 87; limited regulations and, 154; lobbyists and, 73; OWS and, 249; policy response and, 73; political bubble of crisis of 2008 and, 118, 123; political reasons for crisis of 2008 and, 7, 8, 29, 74–75; political responses and, 150–51; real estate industry and, 126–28, 131, 292n6; Republican Party, 279; reversals of power and, 179 Subject Index  •  345 Jefferson, Thomas, 155, 173–74 Jeffersonianism, 173–74, 179, 271, 294n26 Jesus Christ, 282 Johnson, James, 5, 73–74, 132, 186, 293n22 JPMorgan Chase, 276; acquisitions of, 149–50, 159–60; authority of regulatory agencies and, 169; campaign finance and, 80–81, 82; CDOs and, 142; CDSs and, 142; complexity of regulations and, 257; directors of, 22; elites and, 22; political power of, 76–77, 87–88; settlements and, 254 Keating, Charles, 93, 112 Kennedy, John F., 72–73 League of Conservation Voters (LCV), 46–47 legal profession, 81, 289n20 Lehman Brothers, 304n4; bankruptcy and, 3, 6, 16, 43, 57, 166, 173; campaign finance and, 6, 80–81; delays in policy response and, 16, 43, 284n24; equity investment returns and, 121; failure of, 3, 6–7, 16, 43, 57, 284n24; misinformation and, 284n17; political reasons for crisis of 2008 and, Lehrer, Jim, 275 liberal-conservative politics: summary of, 45–47, 287nn25–27; financial issues voting records and, 62–67, 63, 65, 288nn46–47; ideal points and, 48, 52, 53, 54, 62, 65–70; ideological map and, 67–70, 68, 69; ideology scores and, 47–49, 52–58, 53, 54, 61, 69, 163, 288n48; one-dimensional politics and, 49; opportunities for reform and, 251–52; patterns in voting and, 49–52, 51, 53, 54, 54–57, 288n37, 288nn34–35; pop of 2008 and, 52, 54, 54, 57, 195–207, 202, 203, 205, 208, 222–26, 224–25, 226, 298nn29–32; spatial model of voting and, 47–48, 51, 62–68, 63, 65, 66, 288nn46–47; tracking ideology techniques and, 45, 49, 61; weak regulations and, 64, 111 See also ideology Libor scandal: Barclays and, 277; fines and, 277–78; media attention and, 277; UBS and, 277–78; Wall Street Journal and, 278 limited policy responses: opportunities for reform and, 255–56; political bubble pop and, 160, 165–73, 168; pop of 2008 and, 184–89, 194, 200, 217 lobbyists: Dodd-Frank and, 281; financial industry, 87–89, 88, 291n30; information from, 85–87; insurance industry and, 291n30; interests and, 73; pop of 2008 and, 67 localism, 244, 264, 271; institutions’ regulatory responses and, 91–92, 136–37; political responses and, 166–67; pop of 2008 and, 215 Long Term Capital Management (LTCM), 12, 21, 22, 141, 144, 171–72, 285n39 Madoff, Bernard, 26, 73, 170, 285n3 Marquette National Bank of Minneapolis v First Omaha Service Corp (1978), 108 MBSs (mortgage-backed securities): AAA rated, 9, 283n10; summary of, 4, 283; foreclosures and, 221, 300n63; housing bubble pop and, 346  •  Subject Index MBSs (mortgage-backed securities) (continued) 9–10; private sector and, 131, 139, 141–42, 218, 294n34; selfinterests and, 141–42, 294n34; “skin in the game” and, 141, 188–89, 294n34 McCain, John, 19, 41, 55, 93, 200, 214, 230, 277 median household incomes, 121–23, 122 Medicare: reform, 281; vouchers, 280 Mellon, Andrew, 41, 153, 161, 162, 177, 223–24, 286n9 Meriwether, John, 171, 172–73 Merrill Lynch: acquisition of, 3, 125, 149–50; delays in policy response and, 12; failure of, 6–7, 12, 171; investors and investments, 14, 25, 171; on largest bank list, 145; misinformation and, 12, 13, 25 Merton, Robert C., 21, 171 MF Global, 22, 150, 260–61, 276 Miller, Brad, 141, 193–94, 216 Miller Bill (Mortgage Reform and Anti-Predatory Lending Act of 2007), 141, 193–94, 216 minorities, and homeownership, 43, 44, 117, 118, 119, 130, 148 misinformation (inaccurate information), 5, 12–13, 25, 36, 239, 262–63, 284n15, 284n17, 303n9 MMFs See money market funds mobilization of constituencies, 75–80, 77, 78, 289n9 Mondale, Walter, 5, 73–74 money market funds (MMFs), 276, 304n4 moral hazard: bankruptcy and, 156, 159, 176; bankruptcy laws and, 176; crisis of 2008 and, 42–43, 136–37; financial services industry and, 237; free market conservatism and, 208, 225; ideology and, 42–43, 57; mortgages and, 158, 236; populist responses to crisis and, 233; TARP and, 57 Morgan, J Pierpont, 56, 155–56, 176 Morgan Stanley, 25, 119–21, 120 mortgage-backed securities (MBSs) See MBSs (mortgage-backed securities) Mortgage Reform and Anti-Predatory Lending Act of 2007 (Miller Bill), 141, 193–94, 216 mortgages: complexity of contracts for, 139, 221; limited policy responses and, 189–90; market concentration of, 276; moral hazard and, 158, 236; opportunities for reform and, 257; private sector and, 125–26, 158, 189, 218; tax deductions and, 127, 294n26 See also homeownership; MBSs (mortgage-backed securities); predatory mortgage lending; subprime mortgages and crisis Mozilo, Angelo, 19, 44, 73–74, 128, 131, 228, 254, 258 Mullins, David, 171–72 mutual funds, 282 National Banking Act of 1956, 92, 167 National City Corporation, 1–3, 124, 149, 233 National Consumer Bankruptcy Coalition, 81, 94 nationalization, 131, 222, 239 NAV See net asset value negative agenda control, 96–98, 97, 102, 290n15 net asset value (NAV), 304n4 New York Federal Reserve, 6, 21, 113, 144, 167–69, 172, 185 Subject Index  •  347 Obama, Barack: Bain Capital and, 278; bipartisanship and, 195, 298n19; campaign finance and, 278, 304n14; Congressional service, 54; connections to UBS and, 277; debt ceiling and, 278; DoddFrank and, 278; elections and, 279; filibuster hurdle and, 104–5, 205; financial industry and, 72, 74, 162, 186, 238, 295n15, 301n30; financial regulation and, 275; on interests, 71–72; legislation hurdles under, 161, 163, 291n29; opportunities for reform after crisis and, 252–53; polarization and, 195; policy responses and, 105, 291n29; political advisors and, 184–86, 185; political battles of, 277; political reasons for crisis of 2008 and, 4–5; populist responses to crisis of 2008 and, 233–34, 300n6; selfinterest and, 18; Wall Street and, 253–54 See also stimulus package (American Recovery and Investment Act) of 2009 Obamacare (Patient Protection and Affordable Care Act) of 2010, 102, 230, 241, 243–45, 247, 259, 276 OCC (Office of the Comptroller of the Currency), 28–29, 216–17, 281 Occupy Wall Street (OWS), 149, 231–32, 246–50, 257, 259, 302n43, 302nn51–53 off-budget subsidies, 126–33, 218, 271 Office of the Comptroller of the Currency (OCC), 28–29, 216–17 Office of Management and Budget (OMB), 5, 117, 185 one-dimensional politics, 49, 287n27 opportunities for reform after crisis: summary of, 260, 261–62; bonuses and, 258, 264–65; cloture rules and, 268, 303n24; complexity of financial industry and, 258–59; criminal prosecutions and, 254, 266–67; elections and, 252; executive branch and, 252–53, 302n1; financial industry and, 251–53; GSEs and, 255–56; ideology and, 257, 269–70; liberal-conservative politics and, 251–52; limited policy responses and, 255–56; limits on financial services industry and, 264; MF Global failure, 260–61; mortgages and, 257; political reforms and, 267–73, 303nn23–24, 303n28; political risk factor and, 262–63; regulatory capacity and, 266–67; settlements and, 254; simplification of regulations and, 262; state governments and, 266, 271; “too big to fail” and, 265–66; Wall Street and, 253–54 Orszag, Jonathan, 5, 132, 262 Orszag, Peter, 5, 75, 132, 183, 185, 262, 291 OTS (Office of Thrift Supervision), 20, 139, 170, 216 See also FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act) of 1989 “ownership society,” 5, 44, 126, 129, 143, 231, 293n13 OWS (Occupy Wall Street), 149, 231–32, 246–50, 257, 259, 302n43, 302nn51–53 Oxley, Michael, 62–63, 173 See also Sarbanes-Oxley Act of 2002 panics: Panic of 1907 and, 11, 56, 160, 166–69, 176; political responses and, 153, 155, 156–57, 348  •  Subject Index panics (continued) 160; as recurrent, 11–12, 58–59; transitions of power and, 174, 176–77 paralysis (gridlock) See gridlock (paralysis) Patient Protection and Affordable Care Act (Obamacare) of 2010, 102, 230, 241, 243–45, 247, 259, 276 Paulson, Henry: delays in policy response and, 16, 111, 284n24; financial industry and, 214–15, 223–26, 253, 289n23; financial innovation and, 90, 111, 144, 264; moral hazard and, 43; policy responses and, 159, 255; political bubble of crisis of 2008 and, 7, 125–26; self-regulation and, 90, 111, 285n4 See also TARP (Troubled Asset Relief Program) of 2009 Paulson, John, 27, 144, 256 “pay as you go” rules, 199, 298n20 PBS See Public Broadcasting Service pension funds: public and private, 282; state government, 281 personal bankruptcy law, 6, 66, 81, 94, 100 Pitt, Harvey, 11, 123 pivotal politics: institutions’ regulatory responses and, 94–100, 97, 105, 111; pop of 2008 and, 150, 195, 198–207, 202, 203, 205, 210–14, 212, 213, 299nn46–50 PNC Bank, 2, 124, 149, 233, 266 polarization: of fiscal policy, 279; ideology and, 47, 50, 53, 54, 57–62, 58, 61, 288n37; institutions’ regulatory responses and, 90, 104, 110–11; pop of 2008 and, 133, 195, 200, 206; transitions in politics and, 154 policy-making institutions See institutions policy responses: bubbles and, 33–35; complexity of, 80, 188, 196–97, 204, 256–57; executive branch and, 111–12; financial industry and, 111–12; free market conservatism and, 15, 27, 42; Great Depression and, 19–20, 40–41, 128; gridlock and, 154; historical context and, 159–60; ideology and, 15, 27, 40–41, 57; interests and, 73; political reasons for crisis of 2008 and, 10–11; predatory mortgage lending and, 11, 13, 108–9, 147; simplification of, 262 See also delays in policy response; institutions; weak regulations; specific laws and regulations political bubble of crisis of 2008: summary of, 29, 117–26, 292n1; bipartisanship and, 5, 118; concentration in industries and, 134, 144–47, 146, 255, 294n26; crony capitalism and, 131–32, 293n22; deregulation and, 123; equity investments and, 41, 118–21, 120, 292n1; global economy and, 125–26; homeownership and, 117; median household incomes and, 121–23, 122; private sector and, 4–5, 125, 301n37; regulatory capacity and, 123, 145–47, 146; self-regulation and, 125; self-­ regulatory financial market and, 140; whites’ median household incomes and, 122, 122–23 See also crisis of 2008; deregulation; homeownership; political reasons for crisis of 2008 political bubbles, 14–19, 284n22, 284n33 See also ideology; institu- Subject Index  •  349 tions; interests; political bubble of crisis of 2008 political elections See elections political reasons for crisis of 2008: summary of, 29; capitalism and, 19; CDSs and, 9, 10; crony capitalism and, 8; delays in policy response and, 11–12; democracy and, 19; financial innovation and, 8; ideology and, 7–8; ideology in context of, 29, 283n7; ignored information and, 12–13; institutions, 7, 8, 283n8; institutions and, 7, 8, 29, 283n8; interests and, 7, 8, 29, 74–75; misinformation and, 12–13, 284n17; opposition to reforms and, 12–13; predatory mortgage lending and, 11; recurrent financial crises, 11–12; regulatory measures and, 10–11; securitization and, 8–9 See also crisis of 2008; political bubble of crisis of 2008 political responses: summary of, 150–51, 183; bankruptcy laws and, 156, 159, 295n4; cloture rules and, 180; credit markets in historical context and, 155–60, 295n4; delays in historical context and, 160–65; historical evidence for, 58, 153–54; limited policy responses and, 160, 165–73, 168; localism and, 166–67; panics and, 153, 155, 156–57, 160; reconciliation process and, 161, 295n14; reversals of power and, 178–81, 180; short-termism and, 181–83; transitions in politics and, 173–78 politics: bipartisanship and, 5, 18, 85, 106, 118, 132, 182, 195, 298n19; bubbles and, 14–19, 284n22, 284n33; political reforms and, 267–73, 303nn23–24, 303n28; political risk factor and, 262–63 See also ideology; institutions; interests; political bubble of crisis of 2008; political reasons for crisis of 2008; political responses the poor, and homeownership, 5, 45, 137 pop of 2008: summary of, 149–51, 184–90, 222, 227; bipartisanship and, 195, 298n19; campaign finance and, 85, 225, 300n67; cloture rules and, 199, 209, 211, 222; delays in policy response and, 16, 149–51, 161, 188, 194, 200, 206, 297n4, 298n26; elections and, 80, 194–95, 204–6, 205, 215, 223, 225–27, 226; Europe and, 206, 299n41; filibuster and, 189, 194–96, 205, 220–21; funds for acquisitions, 2; gridlock interval and, 102; ideology and, 39–40, 57, 67, 196–98, 215–27, 219, 224–25, 226; ideology scores and, 190–94, 192, 193, 297nn14–16, 298n17; liberal-conservative politics and, 52, 54, 54, 57, 195–207, 202, 203, 205, 208, 222–26, 224–25, 226, 298nn29–32; limited policy responses to, 184–89, 194, 200, 217; lobbyists and, 67; localism and, 215; mobilization of constituencies and, 80; “pay as you go” rules and, 199, 298n20; pivotal politics and, 150, 195, 198–207, 202, 203, 205, 210–14, 212, 213, 299nn46–50; polarization and, 133, 195, 200, 206; populist responses to, 204–5, 298n35; predatory mortgage lending and, 193–94, 216–17, 301n21; state governments and, 206, 216, 299n40; stimulus plan of 2008 and, 350  •  Subject Index pop of 2008 (continued) 198–201, 298nn20–22, 298n24; taxes and, 298n24; transitions in politics and, 194, 201, 206; Wall Street and, 184, 186 See also crisis of 2008; opportunities for reform after crisis; political responses; populist responses to crisis of 2008; TARP (Troubled Asset Relief Program) of 2009; specific laws populist responses to crisis of 2008: summary of, 149, 151, 228–33, 229, 249–50; bonuses and, 36–37, 72, 80, 230–31, 238; bubbles and, 36–37, 286n14; cognitive regulatory capture and, 238; Congress and, 233–34, 300n6; deregulation and, 234; elections and, 230; equity investments and, 158, 295n10; executive branch and, 233–34, 300n6; federal intervention and, 234–39, 236, 300nn11–12, 300n21, 301nn23–24, 301n28, 301n31, 301nn33–34, 301nn36–37; financial industry and, 233–34, 300n6; foreclosures and, 233, 236–37, 301n21; moral hazard and, 233; OWS and, 149, 231–32, 246–50, 257, 259, 302n43, 302nn51–53; pop of 2008 and, 204–5, 298n35; predatory mortgage lending, 244, 256; TARP and, 234–37, 236, 300nn11–12; Wall Street and, 230–33, 235, 300n6 See also crisis of 2008; Tea Party power: of federal government, 91–92, 94, 96, 100; of regulatory agencies, 108–9, 114; reversals of, 178–81, 180; transitions in politics and, 154, 173–78, 194, 201, 206 power of interests: summary of, 75; campaign finance and, 80–85, 82, 84, 85, 225, 289n15, 289n23, 300n67; financial industry and, 78–80, 81–82, 82, 289n20, 289nn11–13; financial services industry and, 76–78, 77, 81; health care industry and, 76; information from lobbyists and, 85–87; legal profession and, 81, 289n20; lobbyists from financial industry and, 87–89, 88, 291n30; mobilization of constituencies and, 75–80, 77, 78, 289n9; real estate industry and, 76, 78, 81–82, 82; retail drug industry and, 76–77 See also power predatory mortgage lending: bubbles and, 26; courts and, 108–9; Democratic Party and, 11, 147; derivatives and, 141; homeownership and, 141; policy responses and, 11, 13, 108–9, 141, 147, 193–94, 216; political reasons for crisis of 2008 and, 11; pop of 2008 and, 193–94, 216–17, 301n21; populist responses to crisis and, 244, 256; Republican Party and, 11, 147; state governments and, 13, 108–9; teaser loans and, 5, 21–22, 26, 138, 217 See also homeownership; mortgages presidential debates, 275 president(s) See executive branch; specific presidents private sector: crises resolution by, 56; crony capitalism and, 294n22; MBSs and, 131, 139, 141–42, 218, 294n34; mortgages and, 125–26, 158, 189, 218; off-budget subsidies and, 126–33, 218, 271; political advisors’ experience in, 6, 183; political bubble of crisis Subject Index  •  351 of 2008 and, 4–5, 125, 301n37; self-regulation and, 132 See also bonuses progressivism, 269–70, 271 psychology of decision making, and bubbles, 32–33, 35–36 Public Broadcasting Service (PBS), 277 Public Utility Holding Company Act (PUHCA) of 1935, 134, 161, 165, 170 Raines, Franklin, 5, 75, 117, 118, 132 Reagan, Ronald: concentration in industries and, 134; delays in policy response and, 178; deregulation and, 134; Fed appointments and, 286n15; free market conservatism and, 270; political reasons for crisis of 2008 and, 4; presidential pocket veto and, 100 real estate industry: bankruptcy laws and, 127; campaign contributions, 277; campaign finance and, 81, 82; financial innovations and, 19; information from lobbyists and, 88; interests and, 27–28, 126–28, 131, 292n6; lobbyists from, 87, 88, 88–89, 289n9; power of interests and, 76, 78, 81–82, 82; psychology of decision making and, 32; self-interests and, 26; state governments and, 141, 147 See also financial industry; housing bubble reconciliation process, 101–2, 161, 295n14; political responses and, 161, 295n14 redistributive egalitarianism, 19 See also egalitarianism redlining, 130, 148 reforms: financial industry and, 281–82; fiscal policy, 280; health care industry, 48, 181, 195–96, 241, 241–43, 250, 251–52; Medicare, 281; of MMFs, 275, 304n4; opposition to, 12–13; reform trap and, 114; Social Security, 281; welfare, 280–81 See also DoddFrank regulatory agencies: authority of, 113, 164, 169, 188–89; regulatory capacity and, 112–15, 292n52; responses of, 20, 111–15, 292n46, 292n52; salaries and, 23 See also specific agencies regulatory capacity: federal government and, 266–67; financial industry and, 112–15, 292n52; Greenspan and, 123; institutions and, 112–15, 292n52; opportunities for reform and, 266–67; political bubble of crisis of 2008 and, 123, 145–47, 146; regulatory agencies and, 112–15, 292n52; SEC and, 105, 123, 147; state governments and, 266 Republican-Democrats, 155, 157, 174, 226 See also Jeffersonianism Republican Party: summary of, 268–70; agrarian interests and, 174; bankruptcy laws and, 173–74; campaign finance and, 83, 277; debt ceiling and, 279–80; financial industry and, 80, 83–85, 85; financial regulation and, 279; financial sector contributions and, 277; foreclosures and, 218–21, 219, 300n62, 301n21; free market conservatism and, 5, 15–16, 18–19, 42, 281; global economy and, 125–26; gridlock interval and, 100–101; ideology and, 39–40, 224–25, 225–26, 279; ideology scores and, 163, 190–94, 192, 193, 297nn14–16, 298n17; 352â•… •â•… Subject Index Republican Party (continued) interests and, 279; limited government responses and, 57, 58; mobilization of constituencies and, 80; negative agenda control and, 96–98, 97; “ownership society” and, 5; polarization and, 110–11, 181; policy responses and, 238, 301n28; political reasons for crisis of 2008 and, 5, 6; populist responses to crisis of 2008 and, 233–34, 300n7; predatory mortgage lending and, 11, 147; reversals of power and, 179–81, 180; selfinterest and, 18; strategic disagreement and, 105–7; tax increases, 279; whites’ median household incomes and, 122, 122–23 See also liberalconservative politics; Tea Party Reserve Primary fund, 276, 304n4 Resolution Trust Corporation (RTC), 11, 165, 296n24 reversals of power, 178–81, 180 Riegle-Neal Act of 1997, 11, 92, 123, 147, 255 “robo-signing,” 26, 256, 285n2 Romney, Mitt: Bain Capital and, 278; campaign finance and, 278, 304n14; campaign strategy of, 279; on Dodd-Frank, 275, 278–79; financial regulation and, 275 Roosevelt, Franklin Delano, 11, 57, 104–5, 161–63, 177, 180, 230, 291n29 Roosevelt, Theodore, 71–72, 74, 269, 271 Roubini, Nouriel, 13, 214 RTC (Resolution Trust Corporation), 11, 165, 296n24 Rubin, Robert, 6, 12, 42, 118, 140, 172, 183, 185 “rules of the game,” 16–17 See also institutions Ryan, Paul, 280 Salomon Brothers, 141, 171 Santelli, Rick, 228, 239–40, 242, 244, 302n39 Sarbanes, Paul, 63, 173 Sarbanes-Oxley Act of 2002, 13, 62–64, 63, 111, 139, 165–66, 178, 288n46 savings and loan crisis (S&L) of 1985: cost of, 45, 131; delays in policy response and, 11, 74, 93, 164–65; deregulation and, 139, 147; elections and, 181–82; FIRREA response, 20; institutions and, 26, 131, 136; limited policy responses and, 170–71, 296n24; policy responses and, 11, 147; state governments and, 108; transitions in politics and, 178 Schapiro, Mary, 304n4 Scholes, Myron, 21, 171 Schwartz, Anna, 282 SEC (Securities and Exchange Commission) See Securities and Exchange Commission (SEC) Secondary Mortgage Market Enhancement Act of 1984, 147, 294n30 Securities and Exchange Commission (SEC): crisis of 2008 and, 4; delays in policy response and, 12; enforcement of regulations and, 18, 74, 79–80, 132, 237, 293n22, 303n9; financial innovation and, 144; gridlock and, 276; implementation of financial regulations and, 276; information from lobbyists and, 87; limited policy responses and, 170, 296n34; MMFs and, 304n4; opportunities for reform after crisis and, 257; policy control and, 279; regulatory capacity and, 105, 123, 147; rule making, 276, 304n4; settlements and, 303n9 Subject Index  •  353 securities and investments industry (securitization): campaign finance and, 82, 82, 289n15; lobbyists and, 87–88; misinformation and, 284n15; political reasons for crisis of 2008 and, 8–9; subprime mortgages and, 33–34 See also MBSs (mortgage-backed securities); specific types of securities self-interest: crisis of 2008 and, 4, 25–26, 285n3; financial bubbles and, 17–18; political bubbles and, 17–18, 284n33; weak regulations and, 72 See also bonuses self-regulation: crisis of 2008 and, 27, 41–42; elite and, 74–75; of financial industry, 27, 42; financial innovation and, 21; ideology and, 41, 42, 286n12; political bubble of crisis of 2008 and, 125, 140; political risk factor and, 263; private sector and, 132 sequestration, 280 shadow banking system, 9–10, 21, 155, 221 Shiller, Robert, 13, 32 short-termism, 181–83 See also elections “skin in the game,” 8, 10, 141, 188–89, 257, 294n34 S&L (savings and loan crisis) of 1985 See savings and loan crisis (S&L) of 1985 Social Security: privatization of, 280; reform, 281 special interests See interests Sperling, Gene, 117, 185 Spitzer, Eliot, 79–80, 108, 186 state governments: bankruptcy laws and, 166; complexity of regulations and, 257; credit markets in historical context and, 157; federal deference to, 108–9, 186, 216–17, 299n58; financial industry and, 59, 108–9, 163, 186, 216–17, 296n19, 299n58; homeownership and, 13, 127, 137, 139, 141; opportunities for reform and, 266, 271; pensions, 281; pop of 2008 and, 206, 216, 299n40; predatory mortgage lending and, 13, 108–9, 190, 216–17, 244; regulatory capacity and, 266; stimulus package of 2009 and, 206; stimulus plan of 2008 and, 198, 200; taxes and, 177 Stiglitz, Joseph, 5, 21, 42, 132, 247, 262, 265–66 stimulus package (American Recovery and Investment Act) of 2009: summary of, 39–40, 194, 206–7, 299n42; delays in policy response and, 161, 206; elections and, 204–5, 205, 206; filibuster and, 205; gridlock interval and, 102; ideology and, 39–40; liberal-conservative politics and, 52, 54, 54, 57, 195–207, 202, 203, 205, 298nn29–32; mobilization of constituencies and, 80; personal tax cuts in, 298n24; pivotal politics and, 150, 195, 198–207, 202, 203, 205; polarization and, 206; populist responses to, 204–5, 298n35; state governments and, 206, 299n40; transitions in politics and, 206 stimulus plan of 2008, 198–201, 298nn20–22, 298n24 See also stimulus package (American Recovery and Investment Act) of 2009 stock market crash of 1929, 11, 31, 40, 57, 161, 170 strategic disagreement, 105–7 subprime mortgages and crisis: summary of, 2, 5, 172; CDOs and, 142; civil lawsuits related to and, 277; complexity of regulations and, 354  •  Subject Index subprime mortgages and crisis (continued) 257; deregulation and, 171; egalitarianism and, 43–44; elites and, 22; Fannie Mae and, 44, 287n18, 303n9; financial loss, 276–77; Freddie Mac and, 287n18, 303n9; global economy and, 144; limited policy responses and, 166, 172, 182; policy responses and, 28, 74, 137–38, 182, 194, 216–17, 288n46; political reasons for crisis of 2008 and, 8–13; predatory mortgage lending and, 189–90, 194; securitization and, 33–34; settlements and, 254; “skin in the game” and, Summers, Lawrence: financial innovation and, 140; Gramm-LeachBliley Act and, 42; limited policy responses and, 172; opportunities for reform after crisis and, 253; policy responses and, 6, 12; as political advisor, 12, 75, 185, 185; political bubble of crisis of 2008 and, 118; private sector and, 6, 183 TARP (Troubled Asset Relief Program) of 2009: summary of, 3, 6, 184, 194, 214–15; bonuses and, 230–31; campaign finance and, 85, 225, 300n67; cloture rules and, 222; delays in policy response and, 16, 161; elections and, 80, 195, 215, 223–26, 226; financial services industry and, 255; funds for acquisitions, 2; gridlock and, 222; ideology and, 57, 67, 222–24, 224–25; liberalconservative politics and, 208, 222–26, 224–25, 226; lobbyists and, 67; localism and, 215; mobilization of constituencies and, 80; moral hazard and, 57; populist responses to crisis and, 234–37, 236, 300nn11–12; repayments to, 279 See also Paulson, Henry taxes: Bush, G W and, 279–80; elections and, 279–80; estate tax and, 279; fiscal cliff and, 279; French, 280; fundamentalist free market capitalism and, 177–78; income, 277–79; increases and, 280; interests and, 280; legislation, 280–81; mortgage deductions and, 127, 294n26; negative policy effects and, 279; pop of 2008 and, 298n24; Tax Reform Act of 1978, 110; Tax Reform Act of 1986, 127 Tea Party: summary of, 232, 239–40, 241, 250; debt ceiling and, 279–80; elections and, 245–46; elite benefactors and, 242; financial industry and, 240–44, 302n42; free market conservatism and, 40, 284n33; fundamentalist free market capitalism and, 16; health care reform and, 241, 241–43; ideology and, 149, 242, 245–46, 246; interests and, 242; opportunities for reform after crisis and, 253; pivotal politics and, 299n50; as a political base, 279; the poor and, 240, 244–45; stimulus package of 2009 and, 240–41; taxes and, 240–41 teaser loans, 5, 21–22, 26, 138, 217 third-party politics, 249, 267–69, 303n26 Thrift Industry Recovery Act of 1987, 164–65, 296n22 “too big to fail,” 43, 123–24, 139, 150, 241, 254–55, 265–66 “too big to jail,” 277 transitions in politics, 154, 173–78, 194, 201, 206 Subject Index  •  355 Troubled Asset Relief Program (TARP) of 2009 See TARP (Troubled Asset Relief Program) of 2009 UBS, 18, 67, 82–83, 125–26, 144, 183, 186, 277–78, 293n22 United Copper Company, 72, 169 U.S Congress: debt ceiling and, 279–80; legislation compromises under FDR and, 11, 161–63, 291n29; legislation hurdles under Obama and, 161, 163, 291n29; polarization and, 50, 53, 54, 55, 57–62, 58, 61, 288n37; polarization of fiscal policy in, 279; political reasons for crisis of 2008 and, 4–5; populist responses to crisis of 2008 and, 233–34, 300n6; reconciliation process and, 101–2, 161, 295n14; TARP and, 3; tax legislation, 280–81 See also liberalconservative politics; voting in Congress; specific parties U.S Treasury: insuring MMFs and, 304n4; UBS and, 277 Volcker, Paul, 136, 164, 210, 250, 262, 286n15 Volcker Rule, 22, 186–87, 210, 253, 262, 264 voting in Congress: financial issues and, 62–67, 63, 65, 288nn46–47; liberal-conservative politics and, 49–52, 51, 53, 54, 54–57, 288n37, 288nn34–35; spatial model and, 47–48, 51, 62–68, 63, 65, 66, 288nn46–47 See also U.S Congress Wachovia Corp (WB), 119–21, 120, 123–25, 145, 149, 255, 266, 292n3 Wall Street: bailouts, 279; bankruptcy laws and, 159; bonuses and, 4, 113, 230–31; campaign finance and, 277; cognitive regulatory capture and, 225; courts and, 108–9; crisis of 2008 and, 126, 217; financial innovation and, 140–41; government employee experience on, 75, 113; housing bubble and, 13; human capital and, 25–26; ideology and, 27, 113, 124; influence of, 6, 167, 169, 171–72, 174; lobbyists from, 22, 162; opportunities for reform and, 253–54; pop of 2008 and, 184, 186; populist responses to crisis and, 230–33, 235, 300n6; self-interest and, 4, 26; trust in, 282 See also financial industry; self-regulation; specific laws Wall Street Reform and Consumer Protection Act of 2010 See DoddFrank Wall Street Reform and Consumer Protection Act of 2010 WAMU/WM (Washington Mutual), 119–20, 120, 124, 139, 145, 150 Warren, Elizabeth, 150, 187, 187, 250, 256, 281 Washington Mutual (WM/WAMU), 119–20, 120, 124, 139, 145, 150 WB (Wachovia Corp.), 119–21, 120, 123–25, 145, 149, 255, 266, 292n3 weak regulations: crisis of 2008 and, 8, 20, 26–27; financial industry and, 64, 74, 141; financial services industry and, 20, 22, 74, 111, 164, 216, 261; institutions and, 20, 139; liberal-conservative politics and, 64, 111; pivotal politics and, 111; self-interest and, 72 welfare reform, 280–81 Wells Fargo: acquisitions by, 124–25, 149, 266, 292n3; campaign finance and, 82; equity investment returns 356  •  Subject Index Wells Fargo (continued) and, 119–21, 120; largest banks list and, 82, 145; mortgage share of, 276; political power of, 76–77, 87–88; settlements and, 254; undermined regulations and, 28–29 Whigs/Whig-Democrats, 173–74, 179 whites, and finances, 122, 122–23, 159 WM/WAMU (Washington Mutual), 119–20, 120, 124, 139, 145, 150 Wolf, Robert, 18, 186, 277 WorldCom, 72, 73, 110, 139, 141, 165, 173 ... references and index ISBN-13: 97 8-0 -6 9 1-1 450 1-3 (cloth : alk paper) ISBN-10: 0-6 9 1-1 450 1-6 (cloth : alk paper)  1.  Global Financial Crisis, 2008–2009? ?Political aspects.  2.  Financial crises—United... understanding of the channels through which politics exacerbates financial crises Whereas much of the discussion of the political underpinnings of the financial crisis has centered on the political. .. Government purchases of mortgage-­ acked securities and other distressed assets would, b it was claimed, prop up markets and halt the financial crisis The dramatic failures of the week of September 15