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.
Financial regulation entered a new, much more contested phase in 2010 – at least in the US. Most officials now concede the existence of systemic risk as a form of “pollution,” meaning that banks and other financial firms do not necessarily internalize the full costs of their structures and activities. And these costs can be huge – potentially large enough, despite recent reform attempts, to cause Great Depression II (or worse).