The Future of the Captured State

The extreme free-market view of finance gained less traction in Europe than it did in the US in recent decades (with the exception of the United Kingdom). But the challenges of implementing effective regulatory reforms in Europe are actually more difficult.

WASHINGTON, DC – Concerns about state capture are nothing new. Special interests hold undue sway over official decision-makers in many countries, and regulators are always prone to see the world through the eyes of the people whose activities they are supposed to oversee. But the rise of finance in industrialized countries has cast these issues in a new, much harsher light.

Before 1939, wages and profits in the financial sector in the United States amounted to less than 1% of GDP; now they stand at 7-8% of GDP. In recent decades, financial assets have expanded dramatically relative to any measure of economic activity, as life expectancy increased and the post-WWII baby boomers began to think about saving for retirement. Compared to the size of the US economy, individual banks are now much bigger than they were in the early 1990’s. (The precise numbers are different in other industrialized countries, but the rise of finance is a general phenomenon.)

The global financial crisis of 2007-2008 and the deep recession that resulted made it plain to see that the financial sector in the US and elsewhere had become too powerful. Since the 1980’s, a form of “cognitive capture” had occurred, with policymakers becoming convinced that innovation and deregulation could only improve the functioning of both financial intermediation and the broader economy. The crisis proved this view completely wrong, imposing massive costs – measured in terms of jobs lost, lives disrupted, and increased hardship – on millions of people.

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