A New Political Economy?

It is useful to consider more general lessons to be learned from my long-run perspective on the bank-government-mortgage nexus. The most important im­plication, for both scholars and policymakers, is that understanding any mar­ket requires making sense of the business models and practices of a market and how they came into being.

During the Depression of the 1930s, in the face of a massive economic crisis, American voters were willing to consider more direct forms of government in­tervention into markets in order to restore economic health. In the case of finan­cial markets, policymakers proposed radically changing the role of government in the economy by intervening to make sure that financial markets were stable. They forced banks to decide which markets to participate in, and they created regulators to make sure those markets were stable enough to provide products for consumers.

The economic crisis of the 1970s caused a rethink in how those relationships should be structured. Beginning in the 1970s, a critique evolved that too much government intervention was responsible for the stagnant economy in the Unit­ed States, which was experiencing slow growth and high inflation.

The policy community, mostly made up of economists, embraced this set of ideas, which came to be known as neoliberalism. Its basic position was that gov­ernment should not try to regulate markets and choose winners and losers but instead should allow firms to compete however they chose and make invest­ment decisions. The assumption was that the invisible hand of the market would always be more efficient than anything a government might manage. Neolib­eralism has been used as a justification for relaxing labor standards, attacking unions, and reducing taxes for the wealthiest citizens.

As part of this neoliberal turn, powerful financial interests pushed change on the largest corporations in the reorganization of American industry during the 1980s merger movement. Institutional investors came to embrace the idea that the purpose of the corporation was to make money for them, the shareholders. It pushed managers to focus only on policies that would raise the share price and, in doing so, changed the relationships between management and employ­ees. Managers that resisted this message found themselves the target of a hostile takeover. By the 1990s, shareholder value capitalism was in ascendance (Useem, 1996).

Economic growth and reduced inflation returned to the United States in the 1980s and 1990s, solidifying public support for these policies.

This has been driven by several forces. First, while economic growth returned in the 1980s and 1990s, it was accompanied by an increasing concentration of in­come and wealth (Lin and Tomaskovic-Devey, 2013). Executives who ran corpo­rations to maximize shareholder value declared war on unions in the 1980s, used technology effectively to displace the remaining organized workers, cut benefits and job security for those that remained, and outsourced and offshored jobs to increase profits in the past thirty years (Van der Swan, 2014). Those who have benefited the most from this, the richest 1 percent of the population, have gotten Republican governments to produce tax policies that have favored corporations and the wealthy over most citizens.

Second, government has also cut back its commitment to provide a social safety net for citizens and provide infrastructure and education for all. In the United States, this has caused an increase in poor health outcomes, drug addic­tion, suicides, and early deaths. One impact of these cutbacks was an increase in pressure on communities of color. These communities experienced the brunt of low wages and insecure employment. They were more likely to have gotten caught up in the prison industrial complex that also intensified in the 1980s in the “war on drugs.”

The financial crisis played an important role in the increasing recognition that neoliberalism as a policy position needed rethinking. The financial revolution of the past forty years was the poster child for the good that deregulation could do. As a result of rewriting the rules by which financial activities were governed, the landscape of American banking was transformed.

Those profits, of course, have ended up mostly with shareholders and mostly with the wealthiest investors. The newest version of American banking, where ten systemically important large banks control two-thirds of all financial assets in the country, raises questions about the degree to which those banks compete and whether they will continue to try to provide credit to all who need it. Ameri­cans perceive that bankers did not appear to suffer in the financial crisis. Bankers continue to draw down outsized pay packages and offer an easy target for citizens disgruntled with a government that seems to favor the wealthy over its citizenry.

A new political economy would recognize that the government-firm relation­ship exists no matter what. The imagery of fettered versus unfettered markets is an illusion. The case of financial deregulation is often put forward as an un­alloyed success of neoliberal policies. But as we have seen, when applied to the mortgage industry, the financial innovation of the past forty years depended a great deal on government. While the banks clearly did it, the government was there to help structure the market, invent new products (most importantly, se­curitization), and produce new rules and laws for banks to take advantage of the new system. Banks had to be coaxed into building the market for mortgage secu­ritization. But once they realized how much money could be made, they quickly took advantage of how the market worked. They figured out how to build verti­cally integrated structures and incorporate the large pools of capital available in the repo and ABCP markets to fund their activities.

Scholars and policymakers also need to recognize that these arrangements always favor some and not others. The relative power of incumbent firms means that they can get regulators and the policy community to support their policy preferences. In this case, we can see that the preferences of the largest banks generally guided the changes in financial regulation. A different kind of political economy would incorporate this understanding into its analysis of any economic sector and its history and links to government. While this is not all necessarily bad, it can lead to negative outcomes. Current policies favor shareholders over stakeholders, capital over labor, and the wealthiest 1 percent of households over all other citizens. But if a different politics prevails, one can expect an interest in redressing these imbalances on the part of citizens. Taking a historical and system perspective on markets allows policymakers to make sense of why what exists is there and what might be done to fit different policy goals.

Finally, such a political economy does not start out with the assumption that there is one best way to organize markets. Neoliberal analysis suggests that mar­ket actors left to their own devices will find the best way to do things through market competition. But if markets are the historical product of government and firms and if incumbent firms are successful at getting the rules they want, it is not clear that this is because they are efficient. It may be because they are stable and powerful. The savings and loan model of mortgages increased homeownership from 43 percent to about 65 percent of households. Mortgage securitization in­creased that to 69 percent, but in its collapse, this has gone back to 64 percent. It is hard to argue that all of that financial innovation produced an efficient system that served the interests of consumers.

There is a huge irony to what happened to the market for mortgages and mortgage securitization after the crisis.

This appears to be a stable arrangement for now. Politicians of all political persuasions with the support of the American public have worked hard to in­crease homeownership in the country. When the bottom fell out in the 1930s, in the 1980s, and after 2008, the federal government rode to the rescue to rebuild the market. Each time it was different, but each time it came to pass. It is difficult to imagine that it will be any other way the next time. Politics will determine whether policymakers will come to use the principles I have elucidated here to make sense of varying sectors of the economy and their link to broader econom­ic processes. The question of creating policies to govern markets requires public support based on some perception of what will be good for the economy. But just as neoliberalism reflected one political moment in responding to a substantial economic crisis, the financial crisis has provided us with another. Moving to­ward a more realistic political economy has already started among scholars and policymakers. It remains to be seen if the public and politicians will embrace it as a way to decide what to do next.