The Crisis-Driven Politics of the Iron Law of Financial Regulation
Abstract
Can significant differences in the regulatory impact between important crisis-and noncrisis-driven financial legislation be explained, at least in part, by differences in the characteristics of their enacting Congresses and the deliberative process by which they are enacted? This paper investigates that question and answers it affirmatively. First, heightened media salience of banking matters and congressional activity in the runup to crisis-driven financial statutes’ enactment when compared to noncrisis-driven ones incentivize legislators to enact legislation with a large regulatory impact. Second, crisis-driven financial laws tend to be enacted in Congresses with more liberal legislators than noncrisis ones, and with House majorities having a greater capacity to implement major policy change without requiring bipartisan support, given the majority’s size and cohesiveness as a voting block. Third, crisis-driven financial laws are often enacted under conditions less favorable to an open deliberative process than noncrisis-driven ones. Large and cohesive House majorities enact important crisis-driven statutes, often on party unity votes, under restrictive rules that can enable majority party leadership to block voting on amendments that might be approved on the floor, reducing or even precluding minority input into policymaking. By contrast, important noncrisis statutes are typically brought to the floor in the House under open rules or by unanimous agreement. In addition, bills enacted as crisis-driven laws are often not subject to a legislative hearing. Such a political dynamic increases the likelihood of less vetted, hence less well crafted, albeit consequential, legislation, as crisis-driven financial laws have a far greater regulatory impact than non-crisis-driven financial legislation. Finally, a principal components analysis, by combining all of the paper’s findings, provides a proof of concept that the politics of important crisis-and noncrisis-driven financial statutes are distinct.
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