Avoiding Another Recession

The Great Recession of 2007–8 led to the passage of the Dodd-Frank Act, which hopes to make it harder for financial companies to engage in the kind of risky, damaging behavior that led to the recession in the first place. But for the legislation to work, the people involved have to support its provisions and intent. In other words, the businesses and people whom the regulations are supposed to regulate must not be allowed to "capture" the regulatory system and manipulate it for their own ends.

In that regard, at least in the first few years after the act was passed, a group of small organizations emerged as important players in the effort to curtail irresponsible behavior by the Morgan Stanleys and Citigroups of the world. Two of those small organizations are the Financial Stability Oversight Council and the Commodity Futures Trading Commission. 

The Financial Stability Oversight Council, a federal body created by Dodd-Frank, deals with the problem of what is known as systemic risk. Systemic risk is any action that, through a series of related, subsequent events, can bring down the entire economy. 

The other organization, the Commodity Futures Trading Commission, already existed. Its mission was expanded by Dodd-Frank to include regulating what are known as derivatives. A derivative is an asset such as a stock or bond that depends on an underlying asset for its value.

What does this all mean? Well, for political scientists, it means this: traditional accounts of the politics of financial regulation are no longer sufficient. The traditional accounts hold that concentrated business groups pilot the industry through new regulatory waters. At least in the last decade, smaller organizations such as the two mentioned here have played a role as well.

For an account of the situation described here, see "After Dodd-Frank: Ideas and the Post-Enactment Politics of Financial Reform in the United States," by J. Nicholas Ziegler and John T. Woolley, in the June 2016 issue of Politics & Society.