Krippner, Capitalizing on Crisis (2011)


“In a world in which capital was scarce, every attempt to allocate credit to one use required denying it for another. Under the existing system of interest rate controls, inflation continually presented policymakers with the necessity of choosing which sector to favor in allocating credit—industry or housing, large corporations or small businesses, municipal finance or agriculture. Deregulation offered a way to avoid this problem: removing controls meant that the market, rather than state officials, could do the choosing in distributing capital between competing sectors. Rather than directly allocating credit through regulatory controls, rationing could be accomplished indirectly through the price mechanism. But, to the surprise of policymakers, prices did not ration very effectively, and in the context of institutional innovations in financial markets, the taps on credit were turned wide open. Free flowing—and expensive—credit reconfigured the political terrain, disorganizing a potentially broad-based coalition of middle-class homeowners and urban advocates that demanded that the burdens of inflation be more equitably shared. In this context, financial deregulation functioned both to alleviate festering social tensions and to set the stage for the financialization of the U.S. economy in subsequent decades” (60)

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