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8 - The Process Approaches Collapse

Politics in the Financial Crisis of 2008

Published online by Cambridge University Press:  05 January 2013

Kathryn C. Lavelle
Affiliation:
Case Western Reserve University, Ohio
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Summary

Unlike the response to a downturn in the business cycle that unfolds over months or years, the government's response to a financial crisis must be immediate to prevent a collapse of the entire system. No doubt, many people are hurt in an economic downturn. However, should a catastrophic failure in the banking system occur, individuals would lose access to their savings and retirement accounts, businesses would not be able to make payments or be paid by their customers, and the government would not be able to conduct its affairs. The aftereffects of policies implemented in a crisis are also more profound than those taken during the ordinary course of the business cycle. A crisis changes the margins around the legitimate use of government action. As a result, the government's response leads to the creation of new institutions, new powers for existing agencies, and new precedents for the future. Hence, this chapter considers the crisis of 2008 to situate it within patterns of conduct of American government in response to crises since the end of the Civil War. Although economic assessments have demonstrated that the excessive accumulation of debt is a common theme in the buildup to a range of financial crises, a particular institutional arrangement and political culture allow them to occur in the United States.

Therefore, rather than providing the type of exhaustive review of the financial crisis of 2008 and government bailouts that are available from other excellent sources, we will explore the politics of the financial system by placing the events against the backdrop of the congressional calendar and bureaucratic politics more broadly. This chapter divides the events and the government's response to them into their immediate and medium-term phases. Each resulted in the passage of a major piece of legislation: one that forced a degree of democratic accountability on the government for the rescue, and another that altered the governing authority among agencies of the federal government and created a new one.

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Publisher: Cambridge University Press
Print publication year: 2013

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References

Reinhart and Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009)Google Scholar
Wessel, David, In Fed We Trust: Ben Bernanke's War on the Great Panic (New York: Crown Business, 2009)Google Scholar
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Stewart, James P., “Eight Days,” New Yorker, September 21, 2009
Department of the Treasury, Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation (Washington, DC: Department of the Treasury, 2009), 55Google Scholar
Episode reported in Kate Berry, “Barofsky Blasts Treasury, Obama for Housing Mess,” American Banker, December 22, 2011, (accessed July 28, 2012)
Chan, Sewell, “Inspector Reports That Program to Help Prevent Foreclosures Falls Short,” New York Times, July 22, 2010
Volcker interviewed in Louis Uchitelle, “Volcker, Loud and Clear,” New York Times, July 11, 2010
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Kelly, Kate and Hilsenrath, Jon, “New York Fed Chairman's Ties to Goldman Raise Questions,” Wall Street Journal, May 4, 2009
McKee, Michael and Lanman, Scott, “Fed Tightens Rules on Board Eligibility for Regional Banks,” Plain Dealer (Cleveland), November 26, 2009
Wyatt, Edward, “In Tough Stance, Democrat Finds Few Allies,” New York Times, May 15, 2010
Appelbaum, Binyamin, “On Finance Bill, Lobbying Shifts to Regulations,” New York Times, June 27, 2010
Dash, Eric and Martin, Andrew, “New Rules May Affect Every Corner of JPMorgan,” New York Times, June 25, 2010
New York Times, June 27, 2010
Weisman, Jonathan, “Geithner's Tax History Muddles Confirmation,” Wall Street Journal, January 14, 2009
Gapper, John, “Anxious…,” New York Magazine, April 18, 2011, 24
Sherman, Gabriel, “The End of Wall Street as They Knew It,” New York Magazine, February 13, 2012

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