The Libertarian and the Lobbyists

by Simon Johnson


Project Syndicate
January 23, 2012

In the three years since the global financial crisis erupted, two dominant views of what went wrong have emerged. It is crucial that we understand each, because their implications for policymakers – and thus for the future health and stability of the global economy – could not be greater.

The first view is that governments simply lost control of the situation, either through incompetence or because politicians were pursuing their own agendas. This is the view heard most frequently from the political right – for example, from people who think that the main problem in the run-up to the financial meltdown of 2008 was government housing policies.

In the United States, among the candidates still competing for the Republican Party’s nomination to challenge Barack Obama in November’s presidential election, Ron Paul stands out for arguing consistently that government is the problem, not the answer, with regard to banking. If the government were removed more fully from the financial sector (including abolishing the Federal Reserve), he argues, the economy would function better.

The second view is that the financial sector lobbied long and hard for deregulation in recent decades, and spent a great deal of time and money persuading politicians that it constituted the safe and modern approach to banking. According to this view, government policies did not fail; on the contrary, they operated exactly as intended – and as bought and paid for.

If this view is correct, the kind of policy prescription recommended by Ron Paul is less appealing. Unless you think that a modern financial sector really can operate with absolutely no regulation of any kind (including, presumably, the rules for banks that come with deposit insurance), the real problem is not government officials’ policy preferences, but what financial-sector lobbyists are able to persuade officials to do.

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Read the papers: here and here