krippner book forum: part 2 – political decisions

Part 1.

Last week, we began our discussion of Greta Krippner’s new book “Capitalizing on Crisis.” Greta’s book documents the fact that corporate profits are more likely to come from finance than non-finance, which is a huge claim about the American economy. Part 1 of the book forum reviewed that basic finding. Her second argument is that this is the “financialization” of corporate profits is due to a series of political decisions in the 1960s, 1970s, and 1980s. That’s what we’ll talk about today.

So let’s jump into the deep end. Krippner’s argument is that political pressures made policy makers drop “Regulation Q.” Q was a banking regulation that allowed the Feds to put a ceiling on interest paid on deposits. Regulation Q was phased out in the 1980s and finally abolished in the 2010 Dodd reform. Ok, so why is Q so important? Well, it meant that there was a clear demarcation between two types of banking: deposit banks, where average folks park their money, and investment banks. There was also a policy making dimension to Q. As long as people parked their money in checking and savings accounts, the Feds could control spending and credit by controlling the interest paid on these accounts. Greta’s biggest argument is that the dismantling of Q made it possible for the business world to shift to borrowing and loaning money as primary form of income, thus prompting financialization. We’ll dig into this in the last part of the forum. But this week, we’ll focus on how and why Q was abolished.

The argument is that the need for credit create public choice pressures. Or to put it in rational choice terms (don’t shoot me, Greta!), the median voter, and the banks themselves, found Q and its consequences very inconvenient. There were multiple interest groups who kept hacking away at Q until it was finally weakened in the 80s and completely dropped in 2010. In additions to the banks, much emphasis is placed on various industry groups, who could not get enough credit, as well as consumer protection groups, who wanted the option of a regime with more expensive loans *and* higher rates of return for bank deposits.

For Greta, the Q episode (not this Q episode)  is one step in a process where banks and American business get more and more wrapped up in credit markets and security deals. The next chapter explains how foreign markets were used by the Reagan administration to deal with fiscal limits, and the penultimate chapter explains how monetarist economic theory was used by the Fed to affect business cycles in an unpolitical way but ended up financializing the American economy even more. What ties the Q episode, Reagan’s debts, and monetarism together is that there are responses to social or political crises that ended up shifting the economy in an unexpected way.

I’ve spent this entire post merely summarizing the book. I did that to give the reader a flavor of what the book is like, but also because the book is fact filled historical writing that needs to be unpacked. Now let me conclude with a few observations, and next week we’ll dive into longer commentary and criticisms. First, this book provides one more reason to focus on consumer protection groups as a prime driver of economic policy change in the 1970s. See Isaac Martin’s book on tax revolts. Second, this is a very anti-Krugman version of recent economic history. It wasn’t income tax reform that made the rich richer. Rather, it was a combination of interest group politics, Fed policy decisions, and new economic theory. Third, where was the political coalition that stood behind the Glass-Stegal regime? The forces against Glass-Steagal, Q and the rest of the system are prominent, but where were the defenders? Since much of the book’s evidence is Fed-centric. this view might be expected.

Written by fabiorojas

May 23, 2011 at 4:34 am

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