A new report for the IMF shows in exquisite mathematical detail, a link between lobbying and risky financial behaviour by major mortgage lenders in the USA. Those that spent the most on lobbying for  “light touch” regulation generally pursued the riskiest lending strategies. The report highlights 33 pieces of federal legislation that would have tamed predatory lending or introduced more responsible banking but were the target of intense lobbying, and that the efforts by banks to resist the legislation overwhelmingly succeeded. In a wonderful exercise in understatement the report authors claim, “that the political influence of the financial industry can be a source of systemic risk.”

The report supports but doesn’t quite spell what has long been obvious: the finance and banking sector had a huge hand in shaping the regulatory framework that has been blamed for enabling the economic crisis. And they continued to play a leading role in crafting government responses to the crisis that were grossly favourable to the banks over the taxpayers that bailed them out. Accusing regulators of being “asleep on the job” misses entirely the highly political process by which legal frameworks regulating financial activity have been established. When it comes to financial stability the foxes have been guarding the chicken coup.

In the USA the nature of campaign contributions and political action committees allow for a much more direct and transparent route to buying political influence than elsewhere. Yet concentrating solely on cash donations obscures the more insidious ways in which a financial oligarchy with global influence has captured and shaped regulatory frameworks that are supposed to act for the public interest. And this regulatory capture has occurred not just between the revolving doors of Washington and Wall Street, but between the City and Whitehall and across the EU as a whole. In the EU instance we lack anything as transparent as a campaign or party donation to link factional interests with public policy. Yet as a 2009 report by Alter EU showed, members of the banking and financial services industry dominate the expert committees that draft and amend  EU legislation. Within the 19 groups that deal with financial services, industry experts outnumber representatives from academia, consumer groups and trade unions by a ratio of four to one. The 229 industry experts even outnumber the approximately 150 Commission civil servants responsible for financial policy-making.

At the heart of the economic crisis lies a quintessentially political problem: the capture of public institutions by an oligarchy that promotes its factional interest as the public interest.  Beyond the still pressing economic question of how to get banks lending again lies a more fundamental political one: how to address the balance of power that still gives the financial sector a veto over public policy even as they hemorrhage public support.

Politicians have become comfortable making populist threats to clamp down on excessive pay and bonuses in the City. Yet tackling excessive bonuses without addressing the size and political domination of the financial sector over public policy will do little to restore stability to the economy or enable regulation in the long-term public interest. 

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