06/13/2011 08:34 am ET Updated Dec 06, 2017

Research Links Financial Crisis To Revolving-Door Lobbyists

Two economists at the International Monetary Fund crunched the numbers and determined lobbying by lenders and other U.S. financial interests encouraged the watering-down of regulations that contributed to the 2007 meltdown of the mortgage market.

Tracking the fate of federal legislation during the six years before the mortgage-driven financial crisis, the economists found that what mattered even more than the amount of lobbying was whether legislators were being lobbied by former members of their own staff.

In their article in the June edition of the IMF's Finance and Development magazine, researchers Deniz Igan and Prachi Mishra wrote, "in the period from 2000 to 2006, a bill that was unfavorable to the financial industry was three times less likely to become law than one promoting deregulation."

Here is their chart to that effect:

After developing their own data set of financial companies’ politically targeted activities, they determined that "there was a clear association between the money affected financial firms spent on lobbying and the way legislators voted on the key bills considered before the crisis."

But the researchers also correlated information from the Center for Responsive Politics' Revolving Door database, which charts the movement back and forth between Capitol Hill and other parts of the federal government, on the one hand, and the world of lobbyists, consultants and strategists on the other.

Network connections had a big influence on voting patterns, Igan and Mishra found. "If a lobbyist had worked for a legislator in the past, the legislator was very likely to vote in favor of lax regulation," they wrote.

Here's the second chart:

(The chart, based on data in their preliminary research paper, shows the effects of "one standard deviation" in the amount of lobbying or the number of network connections.)

The influence of a lobbyist with connections to a given legislator was so great, in fact, that the researchers found that in those cases, additional money spent on lobbying had very little effect. "This suggests that spending more on lobbying isn’t much help to firms with well-connected lobbyists," Igan and Mishra wrote.

Igan and Mishra, along with their IMF colleague Thierry Tressel, published a working paper in May finding that financial institutions and lenders who actively lobbied the federal government in the years leading up to the financial crisis were more likely to benefit from government bailouts beginning in 2008.

They also "found that lenders that lobbied heavily between 2000 and 2006 tended to engage in risky lending practices more often than other institutions over the same period and suffered worse outcomes during the crisis."

"This is consistent with several explanations," they concluded, "including a moral hazard interpretation whereby lenders take up risky lending strategies because they engage in specialized rent-seeking and expect preferential treatment associated with lobbying."

In other words, they do it because they have good reason to believe they can get away with it.

And they have good reason to believe they can get away with it because they use former staffers to lobby current legislators.