The President, Congress, and the Financial Crisis: Ideology and Moral Hazard in Economic Governance

Authors


  • AUTHOR'S NOTE: Thanks Jennifer Connolly and David Gastwirth, Ph.D. students at the USC Sol Price School of Public Policy, for their excellent assistance with the research for this article.

Jack H. Knott is the C. Erwin and Ione L. Piper Dean and Professor of the Sol Price School of Public Policy at the University of Southern California. His work focuses on political institutions, public policy, and public management.

Abstract

This article examines how the democratic political institutions of the president and the Congress interacted with private firms and regulatory agencies to contribute to the financial meltdown in 2008-09. This economic governance system failed to counteract the excessive optimism in the financial markets but rather contributed to and reinforced this development. Political moral hazard weakened institutional checks and balances in economic regulation and contributed to a convergence of political ideology and policy preferences of the president, Congress, political parties, and professional experts. These developments occurred during significant financial innovation, making it difficult to foresee the risk building in the system.

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