Our notional UFO abductee would notice one enormous change when re- turning to the United States a mere two years’later. In politics the Repub- licans had bounced back almost unbelievably strongly. Their gains in the 2010 midterm elections, the largest gains in a midterm election since either the 1930s or 1920s depending on the measure used, gave them a large majority in the House of Representatives (Campbell et al., 2011). The Repub- lican recovery was associated with a resurgence of conservative political energy. In particular, a movement known as the Tea Party received consider- able attention. While its membership—predominantly older, white, self- identifying conservatives—was scarcely a new phenomenon, it provided a degree of passion and ideological commitment to Republican politics not seen for some time. Conversely, Democrats were much gloomier about their prospects and as his approval ratings particularly on the handling of economy were low, President Obama’s prospects for reelection were uncertain. Interests weakened politically by the GFC also staged a remarkable recovery. In particu- lar, banks, which had been everyone’s favorite whipping boy in the immediate
aftermath of the GFC proved politically effective shortly thereafter. In June 2011, for example, banks were able to secure a clear majority (fifty-five) of Senators to support a resolution preventing the Fed from limiting the high
“swipe charges”levied on retailers for debit and credit card transactions. The charges in the United States are very high by international standards and normally retailers, a presence in every state and district, could be expected to be politically effective. Thus, the banks demonstrated political strength in winning majority support in the Senate, strength that seemed unlikely in the immediate aftermath of the GFC. (The limit on charges survived because as is so often the case in the Senate, a supermajority of sixty Senators was required for it to take effect.) By the summer of 2010, President Obama himself was courting Wall Street trying to reestablish ties with supporters endangered by his support for Dodd–Frank and some unkind words about bankers’large bonuses (Nicholas Confessore,“Obama Seeks to Win Back Wall Street Cash,”New York Times, June 13, 2011). Thus, in as little as two years, the political landscape has been reconfigured.
Our imaginary UPFO abductee would have had much more difficulty on his return in seeing what changes had taken place in public policy as a conse- quence of the GFC. This at first glance may seem a harsh and incorrect judgment. Congress passed a voluminous piece of legislation, the Dodd– Frank Act in 2010. The Act has some far-reaching provisions many of which seem to address core issues in the GFC. Some of the most important are as follows. First, the Act creates a Financial Stability Council that pulls together the heads of the majorfinancial regulatory agencies (the Fed, the Treasury, the OCC, SEC, CFTC, FDR, FHFA, NCUA, and the new Bureau of Consumer Financial Protection). The Council would enable regulators to share informa- tion and identify gaps in regulation. Institutions creating securities (Securi- tizers) have to retain 5 percent of the product and therefore the risk. In general,“swaps”(e.g., Credit Default Swaps or CDSs) have to be cleared, that is, sold on exchanges rather than“over the counter”(OTC), thus ending the possibilities for excessive profits based on limited information as described by Morgan (this volume). Significant exemptions to this requirement were included in the Act, however. Important sections of the Act address the problems of imperfect or inadequate information that contributed to the GFC. The SEC was empowered to issue regulations on fiduciary standards and separate legislation (the Credit Rating Agency Reform Act) was required to reveal their methodologies, changes to ratings and must separate rating activities from their marketing departments. These reforms reflected the belief that inadequate work by the credit rating agencies and their attempts to win clients by issuing overly favorable evaluations had caused overconfidence among investors in riskyfinancial instruments. Very controversially, Dodd– Frank banned banks from trading on their own behalf (“proprietary trading”)
in securities and derivatives. This reflected both the belief that the GFC had been caused by banks speculating wildly and also resentment that taxpayers had been obliged to pick up the tab when this speculation failed because the government guarantees banks. This provision is known as the Volker Rule after the one-time chair of the Federal Reserve Board who proposed it. Finally, Dodd–Frank required the Federal Reserve to set capital requirements and impose other safeguards (e.g., conducting stress tests) on larger banks and other financial institutions that pose risks to the entire system (systemic risk) if they fail.
Even the brief summary above of Dodd–Frank’s major provisions indicates that it is an ambitious piece of legislation. Why then is it possible for critics to contend after its passage that little change has occurred in the USfinancial system? For example,Wall Street Journalreporters recently remarked in passing that the United States has“afinancial-regulatory system that is in some ways largely unchanged since the 2008 financial crisis” (Deborah Solomon and Jamila Trindle“New Financial Rules Delayed,”Wall Street Journal, June 15, 2011, A1). As Solomon and Trindle reported, part of the problem was that Dodd–Frank required a multiplicity of rules to be adopted but that“Regulators are so mired by the process of writing rules triggered by Dodd–Frank that some of the most vulnerable areas of thefinancial system haven’t been addressed.” By June 2011, regulators had missed twenty-eight crucial deadlines for writing rules under the Act. Whereas part of this failure was due to the enormous complexity offinancial issues, the delay also resulted in part from industry opposition and an eagerness to delay the process in the hope that a more sympathetic Republican President would be elected in 2008. Thus, it was unclear what effect the Act would have because its implementation required the adoption of over 200 regulations that could be challenged politically (as with the“swipe charges”described above) before taking effect. Meanwhile, the industry could be adept atfinding its way around new regulations. The process of developing regulations in the United States is a highly political and complicated process, a second chance for interests that dislike the initial legislation to reshape it generally once the glare of publicity has subsided. The balance of power in the process of drafting regulations is generally more favorable to well-organized, well-financed interests with specialist knowledge; financial interests obviouslyfit this description. Even if effective and strict regulations were developed, their practical consequences might be slight. For example, while Dodd–Frank required trading in derivatives to be conducted in exchanges rather than “OTC,” most observers thought that the financial industry in which innovation is constant would soonfind ways around this limitation.
A more fundamental criticism is that for all its scale, complexity, and the irritation it caused banks, Dodd–Frank did not resolve the deeper structural
issues connected to the origins of the GFC. While many held that the GFC illustrated the dangers of having relatively few banks that were “too big to fail,” in the aftermath of the GFC the failure of some firms (Lehman) and mergers (Bear Stearns, Wachovia, Wells Fargo) meant that thefinancial system was composed of even fewer banks than before the GFC. Presumably, the failure of these even bigger banks was even less allowable. Proposals to break up the banks into units small enough not to cause systemic problems if they failed were soon discarded. Although Dodd–Frank brought together the heads of the numerous regulatory agencies in the Financial Stability Oversight Council, the legislation did not end the problems that resulted from having numerous weak, often competing regulatory agencies. These under-resourced regulatory agencies compete with each other in persuadingfinancial institu- tions to choose them as their regulator—and pay them the associated fees as often minor legal changes can shift corporations from one agency’s oversight to another’s. A politically resurgent industry continues to face relatively weak and divided regulators. The Republican majority in the House remained implacably opposed to Dodd–Frank, seeking its repeal, hindering its imple- mentation, and making impossible what all agreed were necessary detailed amendments to correct the inevitable flaws and errors in such a complex statute. Republicans’ opposition to the reforms complicates the creation of the regulations required to give it effect and emboldens obstruction from the financial industry.
The bailout of the auto industry shows every sign of being a successful, focused, and, in that sense, limited policy. Strictly, there were two bailouts: one in the last months of the Bush Administration and the second in the early months of the Obama Administration. The second involved the planned bankruptcy of General Motors (GM) and Chrysler as part of a restructuring of the corporations that involved writing down their debts and major conces- sions by the workforce. Chrysler was sold (largely to the Italian manufacturer, Fiat) and the federal government assumed ownership of a large majority of GM’s stock.
Throughout the period of government ownership, the Obama Administra- tion has emphasized the limited scope of its goals. In particular, the Adminis- tration emphasized that it would not use government-owned stock to influence the behavior of corporations it owned and would return them to the private sector as rapidly as is possible. Critics of the automobile bailout focused on whether its terms were tough enough, for example, in terms of wage reductions and whether a dangerous precedent had been set in which the federal government would aid failing businesses. By early 2010, the Obama Administration was able to claim that the policy had been a huge success (Michael D. Shear,“Obama Touts Success of Auto Industry Bailout,”
Washington Post, April 24, 2010). Up to a million jobs had been saved, most of
the money loaned to GM by the government had been repaid and both GM and Chrysler were participating in the revival of the American automobile industry (though not to the same degree as Ford which had escaped govern- ment ownership). Perhaps the only detailed interventions in the affairs of the corporations were a Congressional initiative to halt the reduction in the large number of dealerships both Ford and Chrysler had created and to encourage the preexisting initiative to create electric cars. In general, however, detailed political intervention (e.g., to insist on GM using a supplier in a powerful legislator’s district) or to pursue broader industrial policy goals have been avoided. It would be wrong to overlook the importance of federal government ownership of major corporations in defiance of the expectations of both the varieties of capitalism and American exceptionalism schools of thought. How- ever, it is also important to note that these accidental nationalizations have shown no sign of being associated with or resulting in any new general policy goals such as an industrial policy or commitments by the rescued corporations to wider policy goals. The nationalization of the automobile firms was dra- matic; its consequences have been minimized.