Factors that Limit Regulatory Response in the Wake of the Global Financial Crisis: Ideology, Regulatory Capture, and Power Dynamics

By Frank Weng
2015, Vol. 7 No. 09 | pg. 3/3 |

Conclusion

In conclusion, this essay has argued that systemic risks inherent in an increasingly interconnected capitalist world economy are insufficiently addressed by regulatory reactions to the global financial crisis due to three limiting factors: theoretical neglect of systemic risk by macro-prudential regulation, regulatory capture during the Basel III process, and hegemonic of the US to choose not to strengthen international organizations.

But here, one may point out that while systemic risks are insufficiently addressed, industry based risks have been sufficiently addressed; hence, one need not be completely dismissive of the effectiveness of the regulatory reactions. Indeed, in areas of OTC derivatives, CRA ratings (in EU), and issues of moral hazards there have been strong regulatory reforms. But the counterargument is that these reforms have been market-friendly (Helleiner, 2014). This demonstrates the persistence of market fundamentalism as an ideology and even the limited grounds even MPR has gained.

It also speaks to the exclusive club-style structure within the elite financial community to capture regulators through lobbies. Thus, the significance of the argument here is to suggest that these factors can influence how measures are executed within the sector and within the global economic system.


References

“America’s economy: Points of light.” In The Economist. 2012. http://www.economist.com/node/21558591

Allen, W. and Moessner, R. “Central Bank Co-operation and International Liquidity in the Financial Crisis of 2008– 9.” In BIS Working Papers, No. 310. 2010.

Ashton, P. “An appetite for yield: the anatomy of the subprime mortgage crisis.” Environment and Planning 41. 2009.

Bajaj V. “Mortgages grow riskier and investors are attracted.” In New York Times, 6 September. 2006.

Baker, A. “The New of the Macroprudential Ideational Shift.” In New Political Economy, 18(1). 2013.

Basel Committee on Banking Supervision (BCBS). Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems. Basel: Bank of International Settlements. 2010.

Bengtsson, E. “The Political Economy of Banking Regulation – Does the Basel 3 Accord Imply a Change?” Credit and Capital Markets – Kredit und Kapital, 46(3). 2013.

Bhagwati, J. “The Capital Myth: The Difference between Trade in Widgets and Dollars.” Foreign Affairs, 77(3). 1998.

BIS. Recent Innovations in International Banking, report prepared by a study group established by central banks of the G10 countries. Basel: BIS, October.1986.

Blanchard, O. and Jonathan O. “The multilateral approach to capital controls.” Vox-EU. December 11, 2012. http:// www.voxeu.org/ article/ multilateral-approach-capital-controls

Blustein, P. “How Global Watchdogs Missed a World of Trouble.” CIGI Papers No. 5. 2012.

Bradford, C. and Johannes, L. “A history of G20 summits: The evolving dynamic of global leadership.” In Journal of and Development, 2(2). 2011.

Carin, B. and Schorr, D. “The G20 as a Lever for Progress.” In CIGI G20 Paper No. 7. 2013.

Callan, E., Wighton, D. and Guha, K. “Regulators Urged to Take Back Seat.” In Financial Times. October 21, 2007.

Chey, H. “Why did the US Federal Reserve unprecedentedly offer swap lines to emerging market economies during the global financial crisis? Can We Expect Them Again in the Future?” In GRIPS Discussion Paper 11– 18. 2012.

Cohen, B. “Global Currency Rivalry: Can the Euro Ever Challenge the Dollar?” In Journal of Common Market Studies 41(4). 2003.

Dowd, K. “Moral hazard and financial crisis.” In Cato Journal, 29(1). 2009.

Drezner, D. “The Irony of Global Governance: The System Worked.” In Council on Foreign Relations, Working Paper. 2012. http:// www.cfr.org/ international-organizations/ irony-global-economic-governance-system-worked/ p29101

Dumiter, F. “Basel III Agreement – Between Necessity and Convenience.” In Economic Series, 23(1). 2013.

Fama, E. “Efficient Capital Markets: A Review of Theory and Empirical Work.” In The Journal of Finance 25(2). 1970.

Financial Stability Board (FSB). Charter. 2009. http:// www.financialstabilityboard.org/ publications/ r_090925d.pdf

Fligstein, N. and Goldstein, A. “The Anatomy of the Mortgage Securitization Crisis.” In Markets on Trial: The Economic Sociology of the U.S. Financial Crisis: Part A. 2010.

Frieden, J. “Global Economic Governance After the Crisis.” In Perspektiven Der Wirtschaftspolitic, 13 (Special Issue). 2012.

G20. “The Global Plan for Recovery and Reform.” In Council on Foreign Relations. 2009. http://www.cfr.org/financial-crises/g20-global-plan-recovery-reform-april-2009/p19017

Gadinis, S. “From Independence to Politics in Financial Regulation.” In California Law Review, 101. 2013.

Grabel, I. “Not your grandfather’s IMF: global crisis, ‘productive incoherence’ and developmental policy space.” In Cambridge Journal of Economics, 35. 2011.

Greenspan, A. The Age of Turbulence. 2007.

Giddens, A. “The Rise and Fall of New Labour.” In New Perspectives Quarterly 27(3). 2010. http://onlinelibrary.wiley.com/doi/10.1111/j.1540-5842.2010.01179.x/abstract

Hanson, S., Kashyap, A. and Stein, J. “A Macroprudential Approach to Financial Regulation.” In Chicago Booth Research Paper no. 10(29). 2010. http://papers.ssrn.com/so13/papers.cfm?absract_id-1708173. Accessed February 17, 2012

Harvey, D. A Brief History of Neoliberalism. Oxford: Oxford University Press. 2007.

Harvey, D. The Limits to Capital. Oxford: Basil Blackwell Press. 1982.

Helleiner, E. “Political Determinants of International Currencies: What Future for the US Dollar? Review of International Political Economy 15(3). 2008.

Helleiner, E. “Did the Financial Crisis Generate a Fourth Pillar of Global Economic Architecture?” In Swiss Political Science Review, 19(4). 2013.

Helleiner, E. The Status Quo Crisis: Global Financial Governance After the 2008 Meltdown. Oxford University Press. Kindle Edition.

Jones, B. “Making Multilateralism Work: How the G-20 Can Help the .” In Stanley Foundation, Policy Analysis Brief. 2010.

Kindleberger, C. and Aliber, R. Manias, Panics, and Crashes: A History of Financial Crises. NJ: John Wiley & Sons, Inc. 2005.

Krippner, G. “The financialization of the American economy.” In Socio-Economic Review, 3. 2005.

Kuotsai, T. “The Financial Crisis and the Challenge of Government Regulation.” In Public Performance & Management Review, 37(2). 2014.

Lall, R. “From Failure to failure: The politics of international banking regulation.” In Review of International Political Economy, 19(4). 2012.

Luckhurst, J. “The G20 and ad hoc Embedded Liberalism: Economic Governance amid Crisis and Dissensus.” In Politics & Policy, 40(5). 2012.

Organization for Economic Cooperation and Development. “Methodological Notes: Compilation of G20 Quarterly Economic Growth.” In Organisation for Economic Co-operation and Development. 2012.

Pak, S. Gentlemen Bankers— The World of J.P. Morgan. Cambridge. MA: Harvard University Press. 2013.

Reinhart, C. and Kenneth, R. This Time Is Different. Princeton. NJ: Princeton University Press. 2009.

McDowell, D. “The US as sovereign international last-resort lender: The Fed’s currency swap program during the great panic of 2007– 09.” In New Political Economy 17( 2). 2012.

McLean, N. All The Devils Are Here. 2011.

McVea, H. “Credit Rating Agencies, The Subprime Mortgage Debacle and Global Governance: the EU Strikes Back.” In ICLQ, 59(7). 2010.

Meszaros, G. “Macroprudential regulation: A contradiction in its own terms.” In Journal of Banking Regulation, 14(2). 2013.

Miles, D., Marcheggiano G. and Yang, J. “Optimal Bank Capital.” In Discussion Paper no. 8333. 2011.

Minsky, H. “Longer waves in financial relations: Financial factors in the more severe depressions II.” In Journal of Economic 29. 1995.

Mishkin, F. “Over the Cliff: From the Subprime to the Global Financial Crisis.” In Journal of Economic Perspectives, 25(1). 2011.

Morgenson, G “Debt Watchdogs: Tamed or Caught Napping?” In New York Times. December 7, 2008.  

Norrlof, C. “Dollar Hegemony: A Power Analysis.” In Review of International Political Economy 21(5). 2014.

North, D. “The New Institutional Economics and Third World Development.” In J. Harriss et al (eds), The New Institutional Economics and Third World Development London: Routledge. 1995.

Quaglia, L. “Financial regulation and supervision in the after the crisis.” In Journal of Economic Policy Reform, 16(1). 2013.

Seabrooke, L., and Tsingou, E. “Responding to the Global Credit Crisis: The Politics of Financial Reform.” In The British Journal of Politics and (BJPIR), 12. 2010.

Shiller, R. Irrational Exuberance. NY: Broadway Books. 2005.

Simmons, B. “The international politics of harmonization: The case of capital market regulation.” In International Organization 55(3). 2001.

Soederberg, S. “The Politics of Representation and Financial Fetishism: the case of the G20 summits.” In Third World Quarterly. 31(4). 2010.

Stallings, B. “The Globalization of Capital Flows: Who Benefits?” In Annals AAPSS, 610. 2007.

Tobin, J. “On the efficiency of the financial system.” In P.M. Jackson (ed.) Policies for Prosperity: Essays in a Keynesian Mode. Cambridge, MA: MIT Press. 1989.

Tozzo, B. “Can Theories of Empire Explain the American Political Response to the Financial Crisis?” In Critical Sociology, 39(1). 2011.

Tsingou, E. “Power Elites and Club-Model Governance in Global Finance.” In International Political Sociology, 8(3). 2014.

Wade, R. “Emerging world order? From multipolarity to multilateralism in the G20, the World Bank, and the IMF.” In Politics & Society 39. 2011.

Walks, A. “Canada’s Housing Bubble Story: Mortgage Securitization, the State, and the Global Financial Crisis.” In International Journal of Urban and Regional Research, 38(1). 2014.

Webster, L. “GM in Crisis – 5 Reasons Why America’s Largest Car Company Teeters on the Edge.” In Popularmechanics.com. November 17, 2008. http://www.popularmechanics.com/cars/a3748/4292379/

Verdier, P. “The political economy of international financial regulation.” In Indiana Law Review, 88(4). 2013.

Vestergaard, J. and Wade, R. “The Governance Response to the Great Recession: The “Success” of the G20.” In Journal of Economic Issues, XLVI(2). 2012.


Endnotes

  1. Powerful is indeed the appropriate adjective to describe Alan Greenspan. Not only was he in command of the economy of the world’s most powerful state, he was viewed as an oracle by investors who thought his simple words could signal market confidence or crush the market.
  2. The report is accessible from http://archives.hud.gov/reports/treasrpt.pdf
  3. Hence, Meszaros rightly critiques, “MPR is endowed with properties it simply does not possess. For this reason, the time may have come to abandon the term altogether and shift the debate in a more radical direction that includes… the unavoidable…nature of the capital system’s cycles of accumulation and destruction” (Meszaros, 2013).

Suggested Reading from Inquiries Journal

A number of reports have established a diagnosis of the financial crisis. The first was produced by the Financial Stability Forum, in April 2008 and was the basis for the preparation of the first G 20 meetings in 2008. The International Monetary Fund (IMF) and the G 30 produced updated analysis in 2008 and 2009. More recently, the... MORE»
Advertisement
The global economy is currently experiencing the “most severe financial crisis since the Great Depression.” The ongoing crisis has battered global financial markets and has triggered a world-wide recession. Global stock market values declined by $35 trillion during 2008 and early 2009, and global economic output is expected... MORE»
September 15th, 2008. Lehman Brothers files for bankruptcy. The Anglo- American model of finance collapses. This is a “Big Bang” for the global financial markets. The months following saw a rush to rebuild the premises of the financial markets and set the stage for a regulatory revolution. The G-20 meetings have offered... MORE»
This study examines the effects of the Dodd-Frank Act on community banks in the Northeastern region of the United States. Using annual financial data from years 2010 to 2014 gathered on 82 banks, a regression equation is estimated using the Generalized Method of Moments (GMM) technique described by Arellano and Bover (1995). The... MORE»
Submit to Inquiries Journal, Get a Decision in 10-Days

Inquiries Journal provides undergraduate and graduate students around the world a platform for the wide dissemination of academic work over a range of core disciplines.

Representing the work of students from hundreds of institutions around the globe, Inquiries Journal's large database of academic articles is completely free. Learn more | Blog | Submit

Follow SP

Latest in Political Science

2019, Vol. 11 No. 03
Radical thinking among the far-right is a growing security problem for modern western society. Over the past several decades anti-government ideologies have been gaining legitimacy due to controversial interactions between Millennialist fringe religious... Read Article »
2019, Vol. 11 No. 02
In recent years, climate change has been increasingly framed as a security issue, with some theorists going so far as to call it the most important security issue of the 21st century. This paper will examine the relationship between climate change... Read Article »
2019, Vol. 11 No. 02
The Haitian Revolution of 1791 – 1804 was a successful slave rebellion in the French colony of Saint-Domingue that began in the wake of the French Revolution and went on to influence subsequent liberation movements for decades to come. The... Read Article »
2019, Vol. 11 No. 02
American politics today operates in an arena where truth and objective reality are bent to the designs of particular interests, powerful people and commercial profiteers. All facts are questioned; the truth has purposes. Populist and nationalist... Read Article »
2019, Vol. 11 No. 01
Globalization is generally studied as a process that extensively impacts nations and peoples across every aspect of society. Empirical and theoretical research largely focuses on this effect, seeking to discover the impact of an increasingly globalized... Read Article »
2018, Vol. 10 No. 10
The following paper seeks to elucidate the complex processes involved in the Mexican State’s loss of authority and the subsequent acquisition of this authority by armed criminal groups operating in that country. In theoretical terms, this... Read Article »
2018, Vol. 10 No. 07
The Polish populist Law and Justice Party (PiS) overturned the mainstream consensus in Polish politics by returning to power in 2015 with a populist platform, decrying a selfish elite and advancing policies that critics saw as illiberal and authoritarian... Read Article »

What are you looking for?

FROM OUR BLOG

Finding Balance in Graduate School
How to Read for Grad School
How to Select a Graduate Research Advisor