I think it's safe to say that the financial regulation bill has not evolved the way that Simon Johnson predicted last year. Johnson's thesis was pretty simple -- because of the structural dependence of politicians on financial capital, neither the executive nor the legislative branches would be willing to regulate that sector.
Johnson wasn't necesaarily wrong in making that prediction -- when in doubt, political scientists follow the money as well. Still, the regulation that is likely to emerge is clewarly stronger than expected. In The New Republic, Noam Scheiber has offers his explanation for why:
Basic political science tells us that, when Congress targets a complex industry with billions of dollars at stake, the legislation should weaken as it moves toward passage. The industry will plead its case with vehemence, while voters will be oblivious to the importance of subtle changes. “Words on the page are not that critical to the public,” one derivatives industry lawyer told me in March, conveying a general truism. But something unforeseen is happening as Congress wraps up its overhaul of Wall Street: Key elements of the bill are getting tougher—in some cases markedly so....
What explains the unexpected success? The financial-services industry had counted on public passion subsiding with time. As the derivatives lawyer told me a few weeks ago, “The current strategy you’re hearing is basically to keep Republicans together till cooler heads prevail.” But cooler heads aren’t prevailing. As the bailed-out banks have surged back to profitability while unemployment hovers near 10 percent, the public has, if anything, grown crankier. By holding the line on a tougher reform package, the White House has been able to ride the anger rather than get trampled by it. In a moment of rising public frustration, the populist argument gains force the longer the debate continues.
So does this contradict basic political science? Yes and no. The outcome is still consistent with political science odels -- just not the ones that focus on interest groups. Any Americanist will tell you that interest group politics matters a lot. If public opinion is pretty unified around a high-profile issue, however, then there are hard political constraints that block the ability of lobbyists to do that voodoo that they do so well. And it's pretty clear that the public is thermonuclearly pissed at the financial sector.
Still, this is pretty surprising, because financial regulation is so friggin' arcane. Quick, what's a credit default swap? A collateralized debt obligation? Are they examples of derivatives or not? Sure, readers of this blog likely know the answers to those questions, but I guarantee you that 99% of registered voters do not know the answer. The fact that public pressure and attention is still mobilized on this issue is unusual.
I think it's tied into the one part of the story that Scheiber failed to mention -- the SEC indictment of Goldman Sachs. Whether what Goldman did or not was actually illegal is not the issue. There was a lot of reporting about what Goldman actually did -- and it seems like they weren't acting like just a couple of bookies. The indictment changed the political optics of financial regulation and dramatically reduced the utility of lobbying from the financial sector.
Finreg isn't law yet, and experts like Johnson might argue that their "capture" story works on other dimensions of the regulation. Still, I don't think this is a case where basic political science failed -- unless you think that poli sci should have predicted the SEC indictment.
What do you think?
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Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.