krippner book forum: how Ralph Nader contributed to financialization

As Fabio described, Greta Krippner’s book seeks to explain how our economy came to increasingly rely on finance as a source of profit.  For Krippner most of the important action takes place in the state. By the 1970s the common view was that there was only so much money to go around.  Legislators had taken on the role of allocating scarce capital to various divisions in society.  The question for them became how to distribute capital so as to avoid being blamed for negative outcomes. Political expedience – specifically, seeking to avoid the “unpalatable task” of giving credit access to particular groups – ultimately drove legislators to embrace deregulation as a political solution to the problem of growing discontent with America’s economy. The real source of the deregulation movement in Krippner’s story is the masses that politicians seek approval from to get reelected. At its core, Krippner’s account is about the unintended economic consequences of political pluralism.

Two important historical factors shape Krippner’s political analysis.  The first was that politicians wanted to avoid major social conflicts that put them at risk of being blamed for bad economic outcomes. Politicians need their constituents’ approval to stay in office.  When the economy was booming, legislators were lauded for their “management” of the economy, but when the economy faltered they were suddenly vulnerable to criticism. The second factor was that capital had become scarce (or at least legislators believed it had become scarce) in the 1960s. When economic times were booming in the post-war years and economic growth appeared limitless, the masses were happy because the supply of capital was abundant. However, post-war growth inevitably dissipated, and citizens could no longer sustain the affluent lifestyle they associated with the American dream. Buying an affordable house, sending the kids to college, and other costly ventures would become out of reach for many Americans if credit was not available. Americans were not passive in their discontent. During the early 1970s consumer movements sprung up throughout the country. One of the leaders of that movement, Ralph Nader, actively campaigned to repeal Regulation Q, which put limits on credit availability and restrained many consumers from getting access to credit. The answer, believed many in the consumer movement, was to allow for variable interest rates and give the consumer the freedom to choose the terms of their loans while also generating better returns on savings. On its surface this seemed like a win-win for everyone. Deregulating interest rates would expand credit availability, while also allowing banks to get more creative in their offerings to potential borrowers. In retrospect we  know that this deregulation also accelerated inflation and suppressed production. This had the effect of pushing more of the economy into financial markets and fueling asset price bubbles.

Ralph Nader, of course, wasn’t the only consumer activist who supported reform of Regulation Q. As Fabio described in his post, the regulation of credit was contested by a variety of interest groups, but it was the support of consumer activists like Nader that gave legislators the political cover to make these changes.  Once credit markets were deregulated, the process of financialization could begin. Politicians learned from this experience that deregulation was a great way to win electoral support while also relieving them from accountability over the economy. Politicians learned their lesson and began applying it in other realms as well. The result was a gradual “depoliticization of the economy,” which Krippner describes as “the reorganization of the boundary between the political and the economic so as to allow policymakers to govern the economy ‘at one remove'” (145).  Krippner maintains that while this may have been politically expedient for policymakers, it weakened the ability of the state to take action during serious economic crisis. Criticism of the government’s handling of the recent financial crisis is case in point. But another problem of depoliticization was that it hollowed the nation’s ability to have a national discussion about economic priorities and the normative role of the market. Economic justice has no role in a society where markets “naturally” distribute the flow of capital to where it is most efficiently allocated.

And this returns us to our discussion of Nader and the consumer movements. Those movements were initially focused on giving consumers more protection from predatory producers and also more transparency to facilitate freedom of choice. There was an element of economic justice in those movements. But the push to liberalize credit ended up having the opposite effect on the economy. By pushing for more access to capital, the consumer movement elevated the desire for affluence over the ideology of economic justice. The lesson of financial deregulation is, however, that affluence has pretty severe delayed costs. Access to credit has a high price, as evident by the increasing interest rates and inflation.  Consumer activist groups later admitted that they had made a mistake in supporting deregulation and reversed their position on the need for interest rate regulation. But it was too late. Once deregulation was loosed, it is difficult to recapture.

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