Did Lobbying Contribute to the Financial Crisis?

The answer is a firm yes, at least according to three IMF economists who studied the correlation between firms’ lobbying efforts, financial risk-taking, and default rates. Their findings (abstract here; full report here) show that:

[L]obbying was associated with more risk-taking during 2000-07 and with worse outcomes in 2008. In particular, lenders lobbying more intensively on issues related to mortgage lending and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing originations of mortgages. Moreover, delinquency rates in 2008 were higher in areas where lobbying lenders’ mortgage lending grew faster.

(Digital Vision)

Deniz IganPrachi Mishra, and Thierry Tressel spent two years on the report, which is thought to be the first to document how lobbying contributed to the risk-taking that brought on the financial crisis. They conclude:

While pinning down precisely the motivation for lobbying is difficult, our analysis suggests that the political influence of the financial industry contributed to the financial crisis by allowing risk accumulation. Therefore, it provides some support to the view that the prevention of future crises might require a closer monitoring of lobbying activities by the financial industry and weakening of their political influence.

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  1. KenC says:

    Makes you wonder whether we should have financial limits on lobbying. Or perhaps, CSpan should run a ticker disclosing how much a Senator or Congressman has received and from whom when they speak on the floor about a particular bill.

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  2. Caitlin says:

    Congressmen and Senators should wear the corporate logos of their supporters, just like the guys in NASCAR do.

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  3. BenInDC says:

    This should go without saying, but correlation does not equal causation.

    Firms that like risk, also like lobbying, which has a good amount of risk to it. Lobbying is expensive, outcomes are hard to predict, there can be reputational risks, etc., direct benefits are often nebulous.

    You know what else contributed to the financial crisis? Electricity. If only we had monitored how we use electricity better maybe we would’ve been able to stop the computers from enacting all those dangerous trades and investments.

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  4. Jeremy says:

    KenC, how about letting corporations lobby all they would like but ensuring that it doesn’t make a shred of difference.

    How can we do that? By following the Constitution which strictly limits the power of the Federal Government. Lobby all you like, it wouldn’t amount to anything if the Constitution were legalized.

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    • Joshua Northey says:

      What does “legalizing the constitution” even mean?

      A) The country is run by the constitution. It is the highest law.
      B) If you mean that over time the courts and congress should have stuck to a more literal and exact reading of the constitution, well then the country would have fallen apart in the 1800s and we would be operating under a different constitution and perhaps not as a unified state today.

      Some of the ways we have “strayed” from the constitution have been actively malicious power mongering. A lot of it is also just general institutional creep. But another good portion of it is simply because the document is anachronistic and unfit for running a modern society. The country would have fallen apart 5 different times if we had always been strict literalists.

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  5. Joshua Northey says:

    I have always felt like the running of the country is important enough that the representatives should be sequestered for the entire session, perhaps their entire term. They could call people to testify, but there would not be all these social events and “informational” meetings.

    We run the country in a completely unserious way oblivious to producing actual results. If we were in a more existential period of decision making no one would think this was a good idea. But the sailing is relatively smooth so who cares if the captains are asleep at the wheel? Of course when we inevitably hit an iceberg everyone will be pointing fingers.

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