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Page 1. 1991. THE POLITICS OF FINANCIAL REGULATION AND. THE REGULATION OF FINANCIAL POLITICS: A REVIEW ESSAY. Reviewed by Adam J.
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THE POLITICS OF FINANCIAL REGULATION AND THE REGULATION OF FINANCIAL POLITICS: A REVIEW ESSAY Reviewed by Adam J. Levitin INTRODUCTION .......................................................................................................................... 1992 I.

FINANCIAL RASHOMON.................................................................................................... 1995 A. The Central Banker ........................................................................................................ 1995 B. The Establishment Economist ....................................................................................... 2004 C. The Bank Regulator ........................................................................................................ 2011 D. The Prosecutor ................................................................................................................ 2019 E. The Lobbyist .................................................................................................................... 2023 F. The Professors.................................................................................................................. 2029

II.

FINANCIAL POLITICS ........................................................................................................ 2037 A. The Challenge of 2008 and Its Lessons ........................................................................ 2038 1. The Perfect Storm Narrative ................................................................................... 2039 2. The Regulatory Capture Narrative ........................................................................ 2041 B. Responses to Capture ...................................................................................................... 2049 1. Democratically Responsive Financial Regulation ................................................. 2049 2. Reforming the Regulatory Architecture to Mitigate Capture ............................. 2054 3. Harnessing Rent-Seeking to Neutralize Politics.................................................... 2058

CONCLUSION ............................................................................................................................... 2067

1991

THE POLITICS OF FINANCIAL REGULATION AND THE REGULATION OF FINANCIAL POLITICS: A REVIEW ESSAY THE BANKERS’ NEW CLOTHES: WHAT’S WRONG WITH BANKING AND WHAT TO DO ABOUT IT. By Anat Admati & Martin Hellwig. Princeton, N.J.: Princeton University Press. 2013. Pp. xv, 398. $29.95. BULL BY THE HORNS: FIGHTING TO SAVE MAIN STREET FROM WALL STREET AND WALL STREET FROM ITSELF. By Sheila Bair. New York: Simon & Schuster. 2012. Pp. viii, 415. $16.00. BAILOUT: HOW WASHINGTON ABANDONED MAIN STREET WHILE RESCUING WALL STREET. By Neil Barofsky. New York: Free Press. 2012. Pp. xxvi, 272. $16.00. THE FEDERAL RESERVE AND THE FINANCIAL CRISIS. By Ben S. Bernanke. Princeton, N.J.: Princeton University Press. 2013. Pp. vii, 134. $19.95. AFTER THE MUSIC STOPPED: THE FINANCIAL CRISIS, THE RESPONSE, AND THE WORK AHEAD. By Alan S. Blinder. New York: Penguin Press. 2013. Pp. xix, 476. $29.95. By Jeff THE PAYOFF: WHY WALL STREET ALWAYS WINS. Connaughton. Westport, Conn.: Prospecta Press. 2012. Pp. viii, 277. $24.95.

Reviewed by Adam J. Levitin∗ INTRODUCTION The financial crisis of 2008 was the first truly systemic and acute crisis to occur against the backdrop of the modern regulatory state. The panic of 2008 tested the modern financial regulatory system as it had never been tested before. How did the financial regulatory system fare? Did the regulatory system work before and during the crisis? Is ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– ∗ Professor of Law, Georgetown University Law Center. This Review Essay has benefited from the generous insights of William Bratton, Chris Brummer, Richard Carnell, Jeff Connaughton, Daniel Ernst, Anna Gelpern, Emma Coleman Jordan, James Kwak, Donald Langevoort, Sarah Levitin, Eric Roi