Skip to main content Accessibility help
  • Print publication year: 2013
  • Online publication date: January 2013

10 - Governing the U.S. Financial System


The book posed this question: What features of the American political system make the financial system so prone to crises? It has argued that the answer is far more complex than the common themes of large campaign contributions and agency capture by the financial services industry. Although these features of the system play their roles, we have found that a more profound understanding of the three domains of financial politics comes from an examination of the particular historical path the United States took in developing state capacity to regulate finance. Both the political and financial systems reflect an American political culture that distrusts the centralization of power in any one governing institution at either the federal or state level, and that distrusts the concentration of economic power that large banks by their nature hold. Thus the system is prone to crises because an overarching integrated monetary, fiscal, and regulatory solution at the state, national, and international levels would contract core American values concerning the separation of powers, federalism, and free market capitalism. The flip side is that as the system developed, it generated innovations that gave a diverse population and industries growing access to credit.

Policymaking in the financial area is thus destined to be a victim of its own success. If the regulatory system is working properly, market participants and the interest groups that represent them in the political system question why regulation is even necessary. Regulation appears to stunt growth and stifle innovation for no apparent reason. Interest groups are particularly incapable of organizing to protect themselves from dangers that might have arisen since the last set of regulations were written because they have no direct experience with which to understand such threats. Even if they organized to protect themselves, they would have to cover an immensely intricate and diffuse system that preserves competition among agencies. Thus interest groups do not organize to protect the benefits of a stable system. They organize to take advantage of what they see as opportunities to make a profit. The system of pluralist interest group representation, distorted by the size and resources of the industry, guarantees that change is a constant feature of the system.

Related content

Powered by UNSILO
Oleszek, Walter J., Congressional Procedures and the Policy Process, 8th ed. (Washington, DC: CQ Press, 2011), 366
Christine Harper, “Out of Lehman's Ashes Wall Street Gets Most of What It Wants,” Washington Post, December 28, 2010
Stiglitz, Joseph E., Free Fall: America, Free Markets, and the Sinking of the World Economy (New York: Norton, 2010), 10
Nocera, Joe, “Wake-up Time for a Dream,” New York Times, June 12, 2010
Florida's, RichardThe Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity (New York: Harper, 2010)
Government Accountability Office, Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-Term Structures (Washington, DC: U.S. Government Accountability Office, 2009)
Lowenstein, Roger, “Gambling with the Economy,” New York Times, April 20, 2010
Norris, Floyd, “The Naked Truth on Default Swaps,” New York Times, May 21, 2010
Volcker, Paul, “How to Reform Our Financial System,” New York Times, January 31, 2010
Wack, Kevin, “Levin Blasts Volcker Rule Proposal as Too Weak,” American Banker, November 9, 2011
Protess, Ben and Eavis, Peter, “At Volcker Rule Deadline, a Strong Pushback from Wall St.,” New York Times, February 13, 2012
Meltzer, Alan, “End Too-Big-to-Fail,” International Economy, Winter 2009
Borak, Donna, “Bernanke Rejects Call to Break Up Big Banks,” American Banker, April 26, 2012
Rehm, Barbara A., “Breaking Up Big Banks Won't Work, Any Way You Slice It,” American Banker, April 26, 2012
Fisher, Richard W. and Rosenblum, Harvey, “The Blob That Ate Monetary Policy,” Wall Street Journal, September 27, 2009
Fisher, Richard W. and Rosenblum, Harvey, “How Huge Banks Threaten the Economy,” Wall Street Journal, April 4, 2012
Wyatt, Edward and Protess, Ben, “Foes Revise Plan to Curb New Agency,” New York Times, May 5, 2011
Andrews, Suazanna, “The Woman Who Knew Too Much,” Vanity Fair, November 2011, 231
Wack, Kevin, “How Politics Shaped Obama's CFPB Decision,” American Banker, January 5, 2012
Davidson, Kate, “Will Cordray Recess Appointment Cloud CFPB's Future?” American Banker, January 5, 2012
Blackwell, Rob, “Why Obama Shouldn't Recess Appoint Cordray,” American Banker, January 5, 2012
Adler, Joe, “CFPB Chief Cordray Will Have a Big Voice at FDIC,” American Banker, January 13, 2012
Story, Louise, “Resistance Bogs Down Financial Overhaul,” New York Times, June 6, 2011
Skocpol, Theda and Williamson, Vanessa, The Tea Party and the Remaking of Republican Conservatism (New York: Oxford University Press, 2012), 6
Rich, Frank, “The Class War Has Begun,” New York Magazine, October 31, 2011, 24
“Bernanke to Occupy Wall Street: ‘I Get It,’” Los Angeles Times, November 2, 2011