You describe the situation well up to the point that it blew up the economy. But what happens after the crisis is a different matter. Anyone with any sense can see that the "it's so complicated none of you can possibly understand it" defense hasn't a leg to stand on after it led to catastrophic failure. Regardless of whether one bought that before, financial engineering forfeited its right to call the shots when disaster struck. Yet there has been no fundamental reform, something that is easily explained by Durbin's remark, so I believe Occam is with me here.
There's close to a consensus among the sources I read (Simon Johnson, Nouriel Roubini, Martin Wolf, William K. Black and other apparently credible experts, as well as the usual muckrakers) that political influence is the reason why, for example, the too-big-to-fail banks are bigger than ever despite the systemic risk. Ron Suskind's book even claims that Obama ordered Geithner to wind down Citi and Geithner just ignored him.
Like most people who actually pay some attention to what happened in finance, I trace much of the problem back to deregulation and poor enforcement.
The parties who successfully rolled back regulation made a grave mistake, and should bear the consequences of their terrible judgement.
Similarly, the people who today suggest that regulation isn't the answer, but rather that we should simply let failed banks fails, those people are making today's grave mistake. The people who argued that systemic vulnerability would prevent any failed bank from actually failing were, as I see it, obviously correct. As it turns out, we can't even let a single auto company crash, let alone a nationwide megabank.
Having said all that:
It does us no good to pretend that the other side of this debate isn't a "side", but rather a bought- and- paid- for theater role occupied by those lucky enough to receive lobbying dollars.
The reality is that it's an animating principle of roughly half the American political establishment that regulation is bad, and that its unintended consequences will tend to harm the economy more than crashes will. A pretty large subset of those people also believe that however painful a megabank failure is, it's survivable, and one or two of them will suffice to teach CEOs not to allow their companies to gamble to the brink of failure.
It's no surprise that this half of the establishment receives truckloads of money from financiers; their principles align with the lobbyist's interests. But attributing those principles to the lobbying contributions is an instance of the post-hoc fallacy, unless you genuinely think that finance subcommittee legislators, Republicans, and pro-business "new Democrats" really don't believe in deregulation.
I can separate the bad principle from the "influence" here, is all I'm saying, and having done so have started to conclude that maybe the influence is a red herring in this case.
Lobbying "influence" is bad for all sorts of other reasons! Most importantly: because it consumes gigantic amounts of time, time that could be spent grooming a staff that could have some hope of understanding the issues they're dealing with.
We seem pretty close on the issues but I am more (or is that less?) skeptical about the corrupting influence of money. There is a ton of evidence that people's beliefs are malleable and that money is just the thing to malleate them. No doubt our massaged beliefs are just as sincere as their predecessors; we're terrible judges of ourselves.
It's a bit tangential but Dan Ariely had a brilliant post the other day about how, in conflict-of-interest situations, disclosure not only isn't a solution but actually makes the problem worse. Outsiders have little idea how to interpret what's being disclosed, and insiders feel that they've fulfilled their entire duty by disclosing and proceed to do as they please.
There's close to a consensus among the sources I read (Simon Johnson, Nouriel Roubini, Martin Wolf, William K. Black and other apparently credible experts, as well as the usual muckrakers) that political influence is the reason why, for example, the too-big-to-fail banks are bigger than ever despite the systemic risk. Ron Suskind's book even claims that Obama ordered Geithner to wind down Citi and Geithner just ignored him.
It's not as if there weren't major players advocating for such radical ideas as "bondholders should take losses when an institution fails" (http://www.nytimes.com/2011/07/10/magazine/sheila-bairs-exit...). They just lost politically. No?