Dr. Alberto Martinelli

International Sociological Association, President 1998-2002

Professor of Political Science and Sociology

University of Milan,Italy

tel.+39.347.2799396

alberto.martinelli@unimi.it

http://www.albertomartinelli.it

Alberto Martinelli (Master in Economics and Business at Bocconi University of Milan and Ph.D. (1975) in Sociology at the University of California at Berkeley) is Professor of Political Science and Sociology at the University of Milan. Between 1987 and 1999 he was Dean of the Faculty of Political Sciences. At present, he is President of the Degree course in Political and Social Sciences and of the Master course in Comparative Institutions and Politics. He chaired the Commission for international scientific cooperation of the University of Milan. He taught in various foreign universities, among which the University of California at Berkeley, Stanford University, New York University, the University of Valencia and Cairo Ain Shams University. He is member of the Real Academia des Ciencias Morales y Politicas de España. In 1998-2002 he was President of the International Sociological Association.

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Dear Leo

I attach my paper,

best wishes,

Alberto Martinelli

September 20, 2010

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A sociological analysis of some not adequately analysed aspects of the global economic/financial crisis

Aim of this paper is to analyse key aspects of the global economic-financial crisis, which are either neglected or not sufficiently analysed in most scientific and media accounts, from a sociological perspective, that can supplement macro-economic analyses.I focus o­n the United States -since the crisis has started in the core country of contemporary market capitalism- and I discuss two basic aspects:

a) the cognitive framework which deeply influenced the key decisions taken by both institutional and private actors both in the market and in the political arena,

b) the mechanisms of pressure politics and the aims, strategies and resources of key economic interest groups.

More specifically, first, through the analysis of essays, statements and documents, I discuss the cultural orientation prevailing in the US corporate, government and intellectual elites. This cognitive framework- developed in first-ranking universities in the US and abroad as an instance of rigorous scientific method -has become main-stream economics. The core of this cognitive framework is the neo-liberal conception of the self-regulating market, according to which markets are always capable of restoring their equilibrium whenever either rigorously exogenous factors or statistically unlikely events create imbalances. Its other major cognitive elements-alongside the theory of the market as a spontaneous order- are the predominance of the virtual economy over the real economy, a conception of money that overstresses its symbolic component over its meaning as measure of value and the changing attitude toward risk and trust.

Second, in order to criticize the view that interprets the financial crisis as the outcome of wrong predictions and unforeseeable events, I reconstruct some processes of political lobbying in the US Congress and administration, that were able to influence key decisions concerning de-regulation policy in the double sense of weakening the existing systems of institutional controls (such as the Gramm-Leach-Bliley bill) and of preventing the passing of new rules for the new financial products (such as the amendment to the 1999 federal budget law). Using documents and statistical data, the lobbying process is analyzed in terms of objectives, amount of resources and channels of communication and influence.

A better knowledge of these aspects of the crisis can contribute to identify key obstacles in the implementation of policies aimed at enforcing new forms of regulation of global markets taken at the national and supranational levels.

A structural crisis.

Books, essays and articles o­n the causes, dynamics and impacts of the global economic/ financial crisis and the related economic recession are numerous and growing. Widespread agreement exists o­n the sequence of events leading to the crisis (European Parliament, 2009,US Government Financial Crisis Inquiry Commission, 2010): from the housing bubble and the sub-prime crisis in the US market to the risk of default and the federal rescue with large amount of public money of the two giants of US housing credit Fannie Mae and Freddie Mac and of the biggest US insurance company AIG); from the crisis of the five largest American investment banks that were at the core of global finance (the default of Lehman Brothers and the acquisition or transformation of the others) to the financial panic caused by the vast proliferation of the toxic products of the shadow finance that fostered a generalized crisis of confidence in banks, firms and families, thus contributing to the recession of the real economy.

One cannot find a similar agreement in the interpretations of the nature of the crisis (structural or conjunctural), its causes and dynamics, the responsibilities of private and public actors, the economic, social and political impacts, the responses and exit strategies, (Cooper 2008, Morris 2008, Soros 2008, Read 2009, Woods 2009, Paulson 2010, Roncaglia 2010).

Given the diversity of interpretations of the crisis, I need to place myself o­n the map with a few sketchy remarks. I consider the global financial/economic crisis a structural crisis, the first major crisis of contemporary globalization, that highlights key aspects of a thirty-years phase of world capitalism (structural interdependence, unregulated growth of financial derivatives, inequalities and disequilibria at the world level) and that, in order to be understood, must be framed into a broader context and in a longer time perspective. The crisis exploded in the core of global capitalism, differently from previous regional crisis like the Asian, Mexican and Russian crises in the 1990s. The immediate cause was the US real estate/sub-primes bubble, that provoked a chain reaction affecting the widely extended and highly complex system of related financial products (mortgage back securities, collateralized debt obligations, credit default swaps and other types of hedge funds). But the crisis developed in a context of great expansion of wealth and money liquidity and growing financial interdependence at the world level that has more distant causes, in the early 1981s, with the new economic policies of privatization and deregulation, the expansive monetary policy of the Federal Reserve and other central banks, and the excessive financial expansion (the leverage buy-out boom, the explosion of hedge funds mostly active in the derivatives’ sector, etc.). The continuous expansion of credit, the unchallenged rise of shadow finance, the less and less prudential investors attitude toward risk, the retreat of regulatory agencies, the maximization of share prices, and the windfall gains of chief executives and financial speculators were all phenomena contributing to a series of financial crises that monetary authorities seemed at first capable to manage. But the present crisis could not be managed -as the previous new economy bubble crisis -with traditional monetary policy measures, and required massive injections of public money to save large financial firms from default, both in the US and in Europe. The crisis is thereforestructural and not conjunctural, and has propagated very fast to the whole world.

The crisis is the traumatic expression of the contradictions of globalization, first of all the contradiction between increasing economic, financial and technological interdependence, o­n the o­ne hand, and continuing political fragmentation, o­n the other, which highlights the lack of effective global governance (Martinelli,2003). In this sense we can define the crisis as sistemic, specifying that this term neither implies the collapse of global capitalism, nor a negative evaluation of the whole process of globalization. In fact, structural crises are endemic in capitalism and the way in which capitalism continuously transforms itself. The classics of social sciences, from Adam Smith to Karl Marx, from Max Weber to Karl Polanyi, from Joseph Schumpeter to John Maynard Keynes, have all argued, although in quite different ways, that capitalism is inherently contradictory and transforms itself periodically through processes of creative destruction. Contrary to both the theorists of the market as a spontaneous order, o­n the o­ne side, and the theorists of the inevitable collapse of market capitalism, o­n the other, crises are endogenous to capitalist development, but not destroy it. This crisis is not the end of globalized capitalism, but marks the advent of a new phase, after the previous two thirty years phases (first, ‘les trente glorieuses’, then global capitalism). Insofar as globalization fosters the growth of economic interdependence and technological improvement, can have positive social impacts (although unevenly distributed); insofar as it implies unregulated financialization and the explosion of short term capital movements, negative consequences prevail. The coordination of economic and social policies and the implementation of rules at the national and at global level can make the difference the mix of positive and negative effects.

The present crisis is the expression of the contradictions of world market capitalism, because global finance has developed in new unregulated forms and at unprecedented rate, since the controls of national governments proved to be ineffective given the erosion of sovereignty and have not been superseded by a new system of international regulation and global governance. Major disequilibria have arisen between creditor countries with fast growing, export-led economies, high rates of savings huge balance of trade surpluses and reserves in dollars like China, o­n the o­ne hand, and debtor countries like the United States with highly financialized and mass consumption economies, high levels of public and private indebtedness and huge balance of trade deficits. The growth of global wealth has dramatically reduced poverty in big countries like China and India, but it has also fostered new economic and social inequalities among and within national societies,between developed and developing countries, and between privileged or protected social groups and marginalized social groups. Moreover, other tensions constantly arise from the high fluctuations in energy and raw materials prices stirred by the growth of demand in the fast developing economies. The monetary crisis developed in such a context.

The cognitive framework.

Given its structural character, the crisis must be interpreted in a long-term time horizon (the last three decades). The crisis shows the problematic nature of a particular variety of capitalism-the market-driven model- that is based o­n the notion of the market as a spontaneous order that is capable of self-regulation. Since the 1970s, world capitalism has changed, not in the sense of transforming its core elements and its Weltanshauung(central role of the market and the business firm, driving force of science, technology and innovation, self transformation through periodical endogenous crises and processes of destructive creation), but in the sense that it has globalized to an unprecedented degree by virtue of the ICT revolution and the collapse of its major antagonist mode of economic organization (the USSR state planning model). In this unprecedented process of globalization o­ne of the historical variants of capitalism, i.e. the Anglo-Saxon market-driven variant, has become hegemonic.

The change of the 1970s can be explained in terms of structural economic variables (technological innovation, growing competitiveness, expansionist monetary policy, availability of an increasing amount of money looking for profitable investment, changes in the world trade); all these factors joined in and contribute to corroding the oligopolistic assets of the previous phase. But the assault from below, from the new aggressive entrepreneurial ‘animal spirits’ would not have been so successful without a dramatic change from above, in the cultural climate and in government economic policies ofdeveloped countries. The stagflation of the 1970s-that was generated among other things, by high increases in the cost of energy and raw materials and by the rise of wages- provoked a shift in the perspective of decision makers from the problem of aggregate demand (and the related Keynesian economic policy) to problems of supply of the factors of production (and the related supply-side economic policy). First, the Reagan’s administration in the United States and the Thatcher’s government in the United Kingdom and, then, step by step, the governments of several other developed and developing countries adopted supply-side economic policies of extensive deregulation, privatization, tax cuts and expansive monetary policy.

The joint action of those economic policies and the great opportunities opened for product and process innovation and for market growth by ICT through the construction of networks of global interdependence has fostered a staggering growth of the GDP in several emerging countries (first of all, China, India and Brazil) as well as the continuing growth of developed countries; but, o­n the other hand, has provoked the financialization of the economy (with an excess of wealth looking for increasingly higher financial returns), the predominance of financial control and short-termism in the conduct of the corporation, the growth of inequalities among and within national societies, and serious threats to environmental and social sustainability.

The other major variants of capitalism ( the continental European ‘social market economy’ model and the Japanese ‘neo-paternalistic’ model) have moved into the direction of the hegemonic market-driven o­ne o­n the assumption that the latter was the most competitive; and asimilar path was followed by the fastest growing of the emerging countries, China, that represents the most important expression of Asian authoritarian capitalism.

In order to explain why the market-driven variant of capitalism became hegemonic, it is important to define the cognitive framework that legitimized this specific model, since a key feature of the global financial crisis is the cultural orientation prevailing in the financial, corporate, government and intellectual elites. The core of this cognitive framework is the neo-liberal conception of the self-regulating market, according to which markets are always capable of restoring their equilibrium whenever either rigorously exogenous factors or statistically unlikely events create imbalances. Main stream economic theory- developed in best universities in the US and abroad- has mistaken a phase (the last three decades) in economic development for a normal course of capitalism and has upheld deregulation of financial markets as the best policy and explosive growth of global finance as the main road to growth (Rajan,Zingales,2003). A specific formulation of this paradigm has been Markowitz’ theory of self-regulating financial markets that essentially rested o­n o­ne central premise: that the enlightend self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring their firms’ capital and risk position. Since the 1950s- when it was originally formulated -this theory has for decades seemed incontestable, but the present financial crisis has falsified it, as even true believers in that theory like Alan Greenspan have recognized.

This cognitive framework was at the basis of the ‘Washington consensus’, i.e. the package of reforms suggested by the IMF and the World Bank to policy-makers and aimed at privatization, deregulation, opening to foreign direct investments, imports’ liberalization, market-determined interest rates and exchange rates, besides the reduction of public spending, fiscal discipline and moderate and diffuse taxation.

Other key cognitive elements of this cultural orientation -alongside the theory of the market as a spontaneous order- have been the predominance of the virtual economy over the real economy and a conception of money that overstresses its symbolic component. The financialization of the economy has developed very fast: global financial assets rose from US$ 12 trillion in the 1980s to US$ 241 trillion in 2009 (IMF,2009); a growing number of investors bought sophisticated financial products that were more and more separated form the real economy, seeking higher returns and underestimating higher risks. A growing number of chief executives adopted a model of corporate control that conceives the firm in purely financial terms, according to which each productive unit is evaluated according to its capacity to generate short-term shareholders’ value, while long-term investments are neglected (Fligstein,1990).

The symbolic component of money as an abstract representational system has obscured the other basic meaning of money as a mesasure of value based o­n the production and exchange of concrete goods and services. As a result, monetary symbols have become the subjects of abstract exchanges that take place nowhere else than in their virtual world. Moreover, information-that should be a basic ingredient of rational competitive market behaviour- is missing. The uncertainty that spreads in financial markets during the crisis has been in fact fostered by the lack of information (and of regulation) of the nature and volume of the existing contracts: the creditor does not know his debtor.

This cognitive framework was presented as an instance of rigorous scientific method and rewarded by academic recognition (high impact factor) and Nobel prizes. Actually, applying sophisticated mathematical models to the calculus of risk and return o­n investment and to financial engenering in general is not less ideological than other less sophisticated theories of social sciences. Most of the economic practitioners applying those complex models to risk-product design and risk-management techniques did not fully understand them, but enthusiastically accepted them as incontestable, since they brought high returns and fostered the illusion that risks could be avoided by translating them upon other subjects. Those sophisticated models thus legitimized the new high risk products of financial innovation, short-termism and corporate financial control in firms’ management, and the expansive monetary policy of the Federal Reserve and the US Treasury.

One word of caution in order to avoid misunderstanding. Criticizing the theory of the self-regulating market does not mean denying the role of the market as the central institutional mechanism in the organization of economic processes ( the superiority of the open market with regard to state planning has been historically demonstrated). Too much market has negative consequences as serious as its opposite, i.e. too little market,since o­nly effective regulation can act as a bullwark against crises. It is not the fundamental role of the market that is put into question, but market fundamentalism and the lack of regulation. Conversely, both an excess and a defect of state regulation and government intervention are to be avoided. Economic efficiency and social cohesion are better achieved wherever an effective system of checks and balances exists among the actors and the institutions of the market, the state, and civil society and whenever reasonable compromises are sought in the pursuit of freedom, equality and solidarity. In the last thirty years of global capitalism there has been an excess of unregulated markets, a growth of inequalities and a corresponding lack of government controls and redistributive policies. In other words, we have witnessed too much freedom to exploit o­ne’s own financial capabilities and too little equality of opportunities, as well as a double reduction of freedom, since freedom has tended to be reduced to economic freedom o­nly and economic freedom has tended to be reduced to the production of money through money.

The cognitive aspect of the crisis, i.e. the hegemonic position of the theorists of self-regulating market in main stream economics, is relevant in many ways. First, it provided a ‘scientific’ legitimacy for economic agents (financial institutions, investors, corporate managers, business consultants and government’ advisors) to adopt a type of economic behavior that not o­nly was arrogant and greedy, but underestimated risk: self-regulation did not take place, leverage was excessive with the result of huge gains in percentage of the capital actually invested, but conversely of very high losses as well. Let’s take as example the case of what is probably the most famous of hedge funds, the Long-term Capital Management(LTCM) funded in 1993 by John Meriwhether, with two Nobel prize for Economics as partners (Myron Scholes and Robert Merton); when got into crisis in 1998, the fund was exposed for 100 billions dollars and had a capital of o­nly 1 billion with a leverage of 100, so that a modest loss of 1% was sufficient to loose the whole capital owned and go bankrupt. Since the two economists won the Nobel because of their theories o­n ‘creative finance’ that contributed to legitimate the new financial products, it would not be inappropriate to ask them to give back the prize. The spectacular crashes of individual hedge funds, like LTCM, Amaranth (that lost $6.6 billion o­n energy derivatives), Vega Select Opportunities and several others, were however underestimated and even ignored, since the fact that crashes did not result into a major financial crisis was seen by policy makers like Greenspan and Bernanke as evidence of the resilience of the system; but the persuasion that the self regulation of the investors themselves was quite sufficient and there was no need for outside regulation has proved to be dramatically wrong. As Greenspan said at a Congressional Hearing o­n the financial crisis in October 2008: “to exist you need an ideology: The question is whether it is accurate or not. And what I am saying is ,yes, I found a flaw”: In other words, the cognitive framework is important, and it can be wrong.

Second, and even more important, it legitimated the huge gains of financial investors, corporate chief executives (with pay boosted by stock options), lawyers, consultants, auditors, analysts, opinion-makers and provided arguments for lobbyists by affirming that the explosion of unregulated finance was good for the whole economy.

Third, it fostered the general climate of euphoria of American families, persuading them that housing prices would continue to rise, consumers’ credit would continue to expand, and new financial products that were certified by rating agencies (affected by clear conflicts of interests) were safe since risks were guaranteed by the interconnection of financial institutions.

It must be said that not all economists did not foresee the crisis and underestimated the systemic risk. Just to make a few examples, since long ago Kindleberger (1978) had warned against the risk of an asset inflation due to the rise of shares and house prices. Godley (2007), Kregel (2007) and the other economists of the Levy Economics Institute expressed serious doubts o­n the sustainability of the growth of the American economy. Others revived Minsky’s general theory of financial crises (1982). Roubini insisted o­n the risk of explosion of the housing bubble (2006). Even the IMF’s Global Financial Stability Report in September 2006, just before the crisis, noted, in its usually cautious language, that should growth slow or inflation rise “it is reasonable to wonder whether financial markets might react to less favorable developments in a way that could amplify-rather than dampen-the emerging risk. In particular, concerns have been raised about the potential for illiquidity to emerge in response to unexpected stress in markets for new and complex financial instruments”.Others, like Dodd (2002), argued that if hedge funds are not proving themselves capable of effective self-governance, then the regulatory framework should provide for market supervision and market surveillance; and, more specifically, if they are taking large positions in securities and derivatives markets they should be subject to large trader positions reporting requirements.

The power of lobbies and the weakness of regulation.

The last question is crucial: if self-regulation of financial markets did not work, why the regulatory system- the second bullwark against crises- did not work as well? In other words, if financial actors consciously abandoned prudential rules of capital exposure and risk assessment for the reasons we have outlined above, why regulators did lower their guard as well? Three lines of explanation are here in order: the first focuses o­n the role of globalization in greatly reducing the effectiveness of many traditional instruments of economic policy, including monetary policy and exchange rate policy; the second focuses on policy mistakes and predictive errors of the regulatory authorities; the third stresses the role of active lobbying by a powerful coalition of pressure groups that had clear interests in fostering deregulation and making existing controls unapplicable and ineffective. I will briefly review the first two and concentrate o­n the third.

As far as the first type of explanation is concerned, it is almost a commonplace to remark that integrated world financial markets escape controls where they exist and make new regulations ineffective. The argument is well known: the advance of globalization is generally held to reinforce the problems of effective autonomy and the difficulties of realizing sovereignty in practice. Authors like Shaw (2000) emphasize the transformational effects of new technologies of communication, information processing and transport in facilitating and encouraging the development of global-scale business enterprises, integrated world financial markets and services, and the emergence of new global elites. Such developments, to the extent that they are characteristic of present and future conditions, confront states with serious challenges. Globalization erodes national sovereignty, global social interactions transcend 'national' frontiers and reduce identification with nation-states and their territorially bounded communities. Traditional government action is subject to constraints and pressures arising outside the state's frontiers. Some governmental controls become inapplicable and ineffective, because of fiscal heavens and the high mobility of capital, and limit the effectivenessof traditional instruments of economic policy, including monetary policy and exchange rate policy. Direct influence over industrial and financial systems are reduced as business enterprises exploit the flexibility provided by transnational modes and global scales of operation. Nation states compete with each other not o­nly in terms of policy incentives for foreign investments, but also in terms of reduced controls.

The problem of governance within a fragmented inter-state system is thus compounded, rather than ameliorated, by the advent of globalization. Appropriate political responses represent a pressing and inherently problematical matter. The traditional reliance upon the activities of the sovereign state internally, and a 'balance-of-power' amongst states externally, no longer appears satisfactory to many observers. A range of alternative modes of global governance is therefore under active consideration by students of politics and international affairs, but their effectiveness has still to be proved (Martinelli, 2008).

As far as predictive errors and policy failures and mismanagement are concerned I have remarked above that the predominat cognitive framework of deregulation influenced regulators as well; and we should also consider the degree of novelty of highly complexproducts of financial innovation that made traditional control mechanisms obsolete. This remark raises the question of the relation between innovation (a key feature of capitalist economies) and control (a key feature of democratic polities) and the need for a proactive regulation of financialinnovation.

A related line of explanation of policy failures and ineffective regulation is the fact that previous crises had been successfully managed basically through monetary policy. Previous crises in the 1990s either rose at the semi-periphery of the world capitalist system or, when exploded in the centre as for the new economy asset-price bubble of early 2000s, were successfully managed through further credit expansion (not repeating the key error of the 1930s crisis). The application of Greenspan’s monetary philosophy was effective in managing the crisis without fostering inflation- through the increase of the money supply by the US Treasury- because of the central, privileged position of the dollar and the ensuing willingness of major exporting and saving countries like China and Japan to finance the huge American public and private debt in order to finance their largest export market. But in the real estate asset-price bubble and sub-prime crisis even the monetary policy of very low or even zero interest rates did not work, because of the sudden reversion from generalized confidence to widespread lack of trust and from low risk to high risk perception among bankers, managers, savers and consumers alike. The sudden reversion of trust and the generalized financial panic were made worse by the collective ignorance about the complexity of financial innovation, the end of the illusion in the self-regulating power of financial markets and in the restoring capacity of monetary authorities, and the generalized tendency to save o­neself at the expenses of others when things get worse.

A basis argument of this paper is that the global crisis erupted not o­nly because globalization made national states’ regulation ineffective, and because of predictive errors, policy failures and mismanagement by government authorities, but also because in several countries, and first of all in the United States, existing government controls were dismantled and new o­nes could not be introduced. And this happened because of the successful lobbying of a very powerful coalition of interests with big money at its disposal. Policy-makers have not been taken by surprise because of the highly unlikely series of events (the ‘black swan’ metaphor, Taleb 2007), but because they were to some extent impotent to control as a consequence of the conscious pressures of specific interest groups and of the culture of the self-regulating market.

The components of this powerful coalition are numerous and form a structure of concentric circles: in the core, the protagonists of the new finance, first of all the big American investment banks and their highly paid employees, but also a good number of commercial banks in the United States and other developed economies, hedge funds managers, financial analysts and brokers; in a second circle, corporate chief executives (with pay boosted by stock options), auditing firms which were at the same time consultants of the corporations that they had to audit, rating firms with evident conflicts of interests, lobbyists,lawyers, business and government consultants; in a third circle, members of legislative and executive bodies and of the federal and state bureaucracies; in a fourth circle, academic think- tanks, opinion makers and the media. When we consider that at the end of 2007 with the financial crisis already in full motion, the five largest American investment banks have distributedto a few thousands employees bonuses for a total worth of 38 billion dollars, we can perceive the stake that was involved. And if we add bonuses and stock options for managers of big corporations, the fees for consultant services, we realize that the size of interests at stake and the amount of resources to pursue those interests are very high. Thanks to the resources of wealth, power and prestige, these financial, business, cultural and political elites have effectively lobbied and influenced policy-making in order to weaken the rules and controls system.

So far I have identified social groups rich and powerful, and capable because of their wealth to lobby for their interests in the US political system. But the coalition of interests behind the present crisis is not o­nly powerful but also wide.The large consensus for this type of economy cannot be fully understood without considering that the coalition of interests involved included large numbers of investors and consumers, although with quite different types of benefits; they were the most external circle, people who both participated in the financial boom and later became the victims of the financial crisis. Most of those who bought the products of the shadow finance -and even many of those who sold them- did not know or could not understand the mathematical models and the bundling techniques behind them, but were persuaded of their validity as clever tools for getting high returns while translating the risk to others. The coalition backing the explosion of shadow finance included millions of heavily indebted American consumers ‘who lived above their possibilities’, among whom are the twenty million of consumers who are now running the risk of loosing their homes because they cannot pay the mortgages – many belonging to low income group who could get a loan at a subprime rate, even if they were of the ‘ninja’ type (no income, no job and no asset). The thesis developed by Reich in a book which came just before the crisis without perceiving any sign of its coming (2007), however overtly simplistic, contains some elements of truth. Reich argues that ordinary American is schizophrenic since, as a consumer and investor, he strongly favors the state of the economy (supercapitalism), while as a citizen he fears -or should fear- the risk for democracy in such a system.

There is some truth in Reich’s thesis, but it should not obscure the fact that there are been winners and losers in global capitalism: the most significant winners are chief executives and successful speculators o­n the domestic and international financial markets. The losers are workers whose jobs, working conditions and pensions are put at risk, and investors not in the know (Glyn,2006). Wealth and income distribution in the United States and in other societies with financialized economies has become significantly more unequal (Martinelli, 2007). Barack Obama’s insistence o­n the contrast between the interests of Wall Street and those of Main Street is not just a successful political slogan. And the power of business lobbies is very real.

The importance of lobbying in American politics is well known. It has to do with the institutional architecture of the US polity, where the policy-making is dispersed among complex frameworks of governance, interest groups are very influential and their activities are intense at different entry points to the policy-making process. The history of the United States is rich in examples of the power of the wealthy and business lobbies and of the struggle of great presidents -from Jefferson to Lincoln and the two Roosevelt- for resisting and curbing that power (Perrow 2001, Phillips 2006, Reich 2007).

However, in recent decades, a new factor has significantly increased lobbying power: the fast growth of the costs of political elections in a system characterized by the ‘permanent campaign’ -that is, the fact that political campaigning literally never ends- and by the power of the media (Martinelli, 2007). Several factors responsible for the permanent campaign, the holding of separate federal, state, local and other elections at different times, the decline of traditional party organizations, the diffusion of primaries for selecting candidates, the growing impact of the mass media, the proliferation of polling. As a consequence of more frequent election campaigns, more organization, more communication, more opinion polls, the demand for money has greatly increased, forcing candidates and elected officials to engage in constant fund-raising activities. Rising electoral costs are a common feature of contemporary mass politics all over the world but in the US have reached new highs...

The total cost of American elections has more than tripled in the second half of the XX century -from about 900 million $ in 1951-52 to over 3000 million in 1999-2000- and has increased dramatically (more than doubled) since the late 1970s, both for presidential and congressional elections. Most of the money comes from the Political Action Committees (PACs), made of corporate managers and lobbyists who gather contributions form other managers and business partners. In the same period, the number of lobbyists active in Washington has risen from approximately 5,500 in 1977 to almost 33,000 in 2005 (Congressional Budget Office, various years). The number of lawyers registered in the District of Columbia Bar Association has similarly increased from 21,000 in 18976 to 77.000 in 2004. Even more revealing is another indicator: that percentage of former Congress members who have become lobbyists has grown from 3% in the 1970s to more than 30% in the first decade of this century. And the professional fees have also greatly increased as well: in recent years the starting salary of a former congressperson or a former member of the White House staff with ‘good connections’ is $500,000 a year, but a former chair of a congressional committee or subcommittee can ask as much as $2 millions to pressure their former committees.

Although the overall picture is that of organized pluralism, the interest-group system is biased, since some interest groups endowed with greater resources have always been more influential than others (Dahl, 1976). Despite the large increase in the number of groups active in politics, the dominance of the Washington interest-group galaxy by business is even more pronounced now than it was in the past (Schlozman and Tierney,1981). Corporations- US and foreign- account for more than 50 percent of total lobbyists in Washington, with trade associations add a further 18 percent, whereas citizen groups account o­nly for 4.1 percent, unions for 1.7 percent, civil minorities for 1.3 percent and social welfare and the poor for 0.6 percent. Corporations and trade associations also account for more than 50 percent of total office space, with professional associations coming third with almost 15 percent. Even a policy domain such as foreign policy, where the national interest should prevail over private and sector interests, shows clear signs of privatization, owing to the great influence of specific interest groups o­n decisions concerning key sensitive areas like the Middle East and the oil and weapons industries. The Bush administration has provided evidence of the impact of the business interests of policy makers o­n foreign policy decisions. Although scholars like Berry (1999) argue for a more open interest groups politics in the US, o­n the whole the thesis of the dominance of business interests is convincing. The great majority of these lobbyists and lawyers work for corporations. Since the 1990s more than 500 corporations have permanent offices in Washington that employ more than 60.000 lobbyists, among which a good number of corporate lawyers. Corporate pressure groups are greatly predominant over other groups and, contrary to the latter which are predominantly backing the Democrats, tend to become bipartisan; or, more precisely, have a preference for Republicans, but more and more, after the 1992 Clinton’s victory (and as a result of the efforts of Tony Coelho, head of the Democratic Congressional Campaign Committee) and again since 2006 with the new Democratic majority in Congress, try to win support in both camps.

Two major ways of political influence can be distinguished: o­ne is contributing to the costs of electoral campaigns, the other is to lobbying for or against a given piece of legislation.The former way extends also to candidates who are more politically/ideologically distant, since they can win too; it is the case of the big investment banks giving money both to Mc Cain’s and Obama presidential campaigns. The latter way is targeted to the party, the congresspersons and the government officers who can support the specific interests at stake.Bipartisan financing contributes to explain why Clinton did not succeed to pass a health reform (and Obama did it with such difficulty), since huge money was spent by insurance companies, pharmaceutical firms, the American Medical Association, to pressure also members of Congress not o­nly of the Republican opposition but of the presidential party as well. And it helps to explain why key decisions o­n deregulating financial activities were approved during the Clinton administration. Reich (2007) remarks ironically that the willingness shown by Clinton in hosting corporate leaders to spend a night in Lincoln’s room has confirmed the old saying that the White House is the o­nly hotel where are the guests to leave a chocolate o­n the pillow.

The growing importance of pressure politics must be explained not o­nly by the needs of candidates but also by the willingness to spend money for lobbying. The key factor in this respect is the growing competition among economic sectors, interest groups and single corporations, that has extended from the market to the political system. The case of the software industry and of Google’s fight against Microsoft monopoly practices is illuminating. Before becoming a joint-stock company in 2004, Google had no offices in Washington and praised itself for not getting involved in pressure politics. But everything changed in 2004, millions of dollars are spent every year by Google, not differently from what its competitors (Microsoft, Ibm, Yahoo, Sun, Oracle) do. A similar case was that of Wal-Mart attempt to enter into the banking system that was frustrated by a powerful battle of opposite lobbyists in Washington (Reich,2007).

So far, I have pointed out examples of corporate lobbying which extend the competitive struggle form the market into political arena. In both the Google vs Microsoft case and in the Wal-Mart vs American Bankers Association case, o­ne side was for applying anti-trust laws and the other side for more deregulation. But in the case of the shadow finance, lobbying o­n the deregulation side was much more powerful that pressure politics o­n the other side. The lobbyists of shadow finance acted both to dismantle existing controls and to block new regulatory measures, thus contributing to the global crisis.

Many are the examples of effective lobbying in favour of deregulation. A very relevant o­ne was the approval in November 1999 of the Gramm-Leach-Bliley Act, that drastically softened controls and constrains o­n financial activities, abrogating among other things the Glass-Steagall that, since the New Deal and for more than seventy years, had maintained the activities of commercial banks separated from those of investment banks in order to protect investors (it has been estimated that 400 million dollars have been spent in lobbying to get this result). Even more relevant in avoiding any control for the products of derivative finance was the amendment to the budget law of the last year of the Clinton administration, presented by senator Gramm: the amendment freed financial derivatives from any type of control, both from the surveillance of the (SEC) and of the Commodity Futures Trading Commission (CFTC)-the federal agency that has been created to control contracts originally introduced to shore firms from fluctuations in energy and raw materials prices and that had later degenerated into fast growing, purely speculative financial products.

The CFTC provides an example of the second type of action, the o­ne aimed at avoiding regulation: two years and half earlier than the passing of the Gramm amendment, the newly appointed head of CFTC Born had asked to regulate futures -or at least to ask brokers working in deregulated financial firms to periodically inform about the overall level of their financial exposure; but both requests were rejected by Federal Reserve president Greenspan, Clinton’s Treasure Secretary Rubin e SEC president Levitt. Another illuminating case of the second type of lobbying action was the bill passed by the House in 2005 that authorized the Commodity Futures Trading Commission (CFTC) to investigate the price of gas and required gas producers and sellers to keep an official price record. The bill was backed by the Industrial Energy Consumers of America, but fiercely opposed by the much more powerful lobby of financial services (made by the Swaps and Derivatives Association, the Bond Market Association, the Securities Industry Association, the Futures Industry Association), that finally won. The same interest groups had lobbied in 2000 in order to exempt from regulation ‘over-the-counter’ transactions for energy raw materials in the Commodity Futures Modernization Act (what was later called the Enron clause); to obtain the SEC decision to allow overleveraging, i.e. the three times increase of the indebtedness capacity of investment banks, bringing the leverage from 1:12 a 1:33; and to resist any attempt to submit the credit default swaps (the nominal value of which was estimated in $ 58 trillions in 2004) to a regulating authority; to achieve that still in April 2008, the project for a clearing house of financial transaction was rejected by a presidential commission formed by Greenspan, Rubin e Levitt.

It is worth noting that this type of successful pressure politics took place both in the Clinton and Bush administrations, showing-as I argued earlier- that although Republicans are o­n the whole more sympathetic to Wall Street pressures, corporate lobbying is bipartisan. And similar networks of interest groups have been active in the other developed and developing economies, from the European Union to Japan to the BRIC countries. Although the strength and pervasiveness of corporate lobbying is widely recognized by Democrats and Republicans alike, little has been done until recently. Obama has made the need to curb the power of lobbyists a leitmotiv of his electoral campaign and a key element of his consensus formation from the White House, will he be able to win strong resistence against any attempt of control? The analysis conducted so far can help to try an answer.

Are these factors resisting regulatory policies?

A better knowledge of these aspects of the crisis can contribute to identify key obstacles in the implementation of policies aimed at enforcing new forms of regulation of global markets.

Are these factors less powerful after the crisis? With some cautiousness I say they are. The cognitive framework of the self-regulating market is still strong but its cultural hegemony is less mainstream in economics and more disputed by policy-makers and in the public discourse. There have been increasing critiques o­n mainstream economic theory and method. For example, Lawson (2009) takes the economic profession at task for prioritising technical acumen over concern for relevance and argues that when addressing an open social system it is futile to cling o­n mathematical-deductive methods and is necessary to adopt alternative approaches concerned more with understanding underlying structures and mechanisms and real world possibilities. The question is not to reject mathematical models, but to avoid relying o­nly o­n abstract modelling with no reference to the contributions of other social sciences and history to the study of real economic processes. A recognition of this need has been the granting of the 2009 Noble Prize for Economics to two scholars of governance: Olsen (a political scientist) and Williamson (an economic sociologist). Among the numerous signs of a new intellectual climate are the revival of minority traditions in Economics from neo-Keynesian to neo-institutionalism.

As for the other factor, the power of lobbying and pressure politics, and limiting the analysis to the US case, it is still strong, but Obama has been successful in trying to build a new majority, reversing the previous new Republican strategy-developed by Reagan-put an end to the democratic hegemony supported by the social coalition originally formed in the New Deal and consolidated Kennedy’s New Frontier and Johnson’s Great Society. It consisted in concentrating the traditional hostility of middle class America against ‘big government’, but not against ‘big business’(as it had been several times in the past (Martinelli,2007) and was able to integrate the two different and to some extent opposed streams of the political critique brought against liberal principles: populism and conservatism. Unlike in previous periods, the traditional populist argument against the big government of Washington politicians and bureaucrats was disconnected from the parallel critique against politics-corrupting big business, as brought by the early-twentieth century populist movement, because business elites were able to present themselves as the true defenders of individual initiative and the free market against the hypertrophic federal government-which was blamed for the crisis of political authority. With a remarkable ideological turnaround, business elitism-which had been both the target and the adversary of populism-was able to acquire new legitimacy through the latter.

The economic crisis has helped Obama to reverse this situation; he has pledged to defend Main Street against Wall Street and has been able to direct o­nce again popular aggressiveness toward big business and the irresponsible financial oligarchy. At the same time, the federal government finds new legitimacy in adopting effective measures to manage the crisis, to regulate shadow finance, and in implementing basic reforms like the health reform. To the famous Reagan’s saying that government is the problem, not the solution, Obama answers that it depends o­n what government does.

Obama has made people’s criticism of Wall Street and irresponsible finance a key element in his strategy of consensus formation. Judicial investigations o­n illegal operations of Goldman Sachs’ managers have helped, as well asthe exposure of the huge bonuses for chief executives of banks bailed out with citizens’ money.But the coalition of interests resisting regulation is still strong and the relations between finance and government are still very close (not by way of some conspiracy, but simply through close often personal relationships between high level government officials and business and banking officials who are occasionally trading places). The key testing ground of Obama’s effort to regulate financial activities will be the bill recently passed- in partially different versions- by the House of representatives and the Senate. The two bills-that still have to be reconciled- provide the most sweeping overhaul of financial regulations since the 1930s and include: the creation of a new watchdog agency; restraints o­n larger banks, allowing them to take fewer risks; requiring borrowers to prove that they can pay back even the most basic of mortgages; giving the Federal Reserve the power to take control of large firms at risk of collapse - and break them up if necessary; reform of the complicated derivatives market. The bill creates new ways to watch for financial risks and makes it easier to liquidate large failing firms. In theory banks will be taking fewer risks - and they will certainly be less profitable. Obama said Americans would never again pay "for Wall Street's mistakes" adding that Wall Street had tried but failed to scupper the bill.

But the consensus that Obama can get from his policy of financial regulation would be nullified if the exit strategies from the crisis are not successful. The most important testing ground for a strategy of more balanced relations between market and politics is an effective global governance of the world economic crisis capable of fostering a new sustainable growth.Governments’ policies to foster the economic recovery and measures for market regulation must be effective domestically and coordinated at a supra-national level as well; and state actors must work together with non state actors, since global interdependence needs global governance and the active involvement of all key actors of world society.

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