Tyler Cowen agrees with our argument in 13 Bankers that there is a confluence of interests between the financial sector and the government that results in policies that are generally favorable to the banks. Cowen argues, however, that it is Washington, not Wall Street, that is calling the shots. The federal government needs a large and concentrated financial sector and liquid markets in order to finance its large and increasing debts, and for that reason has allowed the megabanks to flourish. In Cowen's words:
It's our government deciding to assemble a cooperative ruling coalition -- which includes banks -- at the heart of its fiscal core. It's our government deciding who belongs to this coalition and who does not, mostly for reasons of political expediency and also a perception - correct or not -- of what is best for the welfare of American voters. If we don't in this year 'get tough' with banking regulation, it's because our government itself doesn't want to, not because of some stubborn recalcitrant Republicans.
One piece of evidence Cowen provides is the government's past willingness to bail out entities other than major banks, such as Mexico and (via the International Monetary Fund) emerging markets such as Indonesia. I find this not entirely convincing, since the indirect beneficiaries of those bailouts often included U.S. banks who had lent money indiscriminately to the latest developing-world "economic miracle." But it is certainly true that the federal government has motives other than simply looking out for Citibank.
More generally, I would argue that our interpretation and Cowen's are not necessarily contradictory. There is certainly a symbiosis between the banking sector and the federal government, although our book is predominantly about one side of that relationship. When push came to shove in late 2008, the banks' ultimate power was not that they were secretly controlling the levers of power, but that their place at the center of the financial system enabled them to hold the real economy hostage. It was politicians in Washington who made the decisions. In early 2009, President Obama tried to make it clear that he was taking orders from no bankers. But he, too, decided that the government needed the banks it had -- instead, for example, of taking over the weakest megabanks and making them wards of the state.
Cowen is no doubt right when he says that the government finds it convenient to manage its debts through a handful of broker-dealers. In fact, the government debt is handled by a continuum of entities, from the Treasury Department (part of the administration) to the Federal Reserve Board of Governors (an independent government agency) to the Federal Reserve Bank of New York (a private institution with a government mandate) to the Wall Street broker-dealers.
Still, though, I find it unsatisfying to say that the weakness of financial reform is that "our government itself doesn't want to [get tough]" -- unsatisfying because the government is the product, and the creature, of private interests. And if "the government" has a certain view of the world -- one in which large, sophisticated financial institutions play a central role -- in this case that view was largely promulgated by the financial sector and in service of its own interests.
The counterargument to my counterargument (I don't go to law school for nothing) is that governments, like banks, are made up of people, and those people have their own interests apart from those of either the voters who vote for them or the corporations who fund them. So "the government" can constitute a distinct interest group.
If this is the case, I still think the striking fact of the past few decades is that the "government employees" interest group and the "bankers" interest group came to see their interests as being largely identical, at least on issues affecting the financial sector. And the problem is that the interests of those two groups are not the same as the interests of the economy or society at large. The solution still lies in politics: convincing the government employees that they should represent the interests of society at large, not those of the banking sector. But insofar as the government independently needs the financial system we have, that only makes the job that much tougher.
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