In today's global landscape, corporations play a pivotal role and, in many ways, have a greater impact on our lives than governments. Their influence on the economy, democracy, and the rule of law is profound, shaping rules, enforcement mechanisms, international agreements, and the provision of essential services. The Center on Democracy, Development and the Rule of Law (CDDRL) at Stanford’s Freeman Spogli Institute for International Studies (FSI) is pleased to announce the launch of the Program on Capitalism and Democracy (CAD), which will explore the complex interactions among democratic institutions, markets, and private-sector participants. 

Led by Professor Anat Admati, affiliated faculty at CDDRL and the George G.C. Parker Professor of Finance and Economics at the Stanford Graduate School of Business (GSB), and undertaken in collaboration with the Corporations and Society Initiative at the GSB, CAD will explore the potential opportunities, tensions, and challenges to democratic governance that capitalism presents. Whereas markets and private-sector institutions need effective governments and laws to enable their success at scale, the forces of capitalism can undermine democratic institutions, distort rules and enforcement, and exacerbate injustice. Through research, policy development, and educational activities, CAD will seek approaches that promote truth, accountability, and the proper balance of power so that society can realize the full benefits of both capitalism and democracy. 

“We do not have to choose, as some suggest, between ‘free market capitalism’ and ‘big government,’” said Anat Admati. “Rather, we must create a system in which markets and corporations can thrive without distorting the economy and democracy and in which democratic governments write and enforce proper rules for all. I am excited to launch the Program on Capitalism and Democracy and eager to promote interdisciplinary collaborations and make a positive difference.”

In a CDDRL research seminar series talk, Anat Admati — the George G.C. Parker Professor of Finance and Economics at the Stanford Graduate School of Business — shared findings from her research on how banking practices can undermine democracy. Her talk highlighted themes from the new and expanded edition of her book, The Bankers’ New Clothes: What is Wrong with Banking and What to Do About It. Coauthored with Martin Hellwig, the book’s latest edition was published this year by Princeton University Press.

Admati argues that banks use their positions of influence to exploit their symbiotic relationships with politicians, breaking and distorting rules with impunity. The powerful consensus in the policy establishment that banks cannot be allowed to fail, has afforded these banks unrestricted power, knowing that the government will do whatever it takes to keep them afloat. The outcome has been detrimental to the rule of law and the quality of democracy. 

Admati brought to focus the Financial Crisis Inquiry Report, which was formed in the wake of the 2007-2009 Global Financial Crisis. The report found that the crisis was avoidable, and attributed the failures to gaps in regulation. The same weaknesses in the system of regulation, Admati noted, persist today. 

Much of the problem is rooted in the lack of sufficient equity. Banks, in other words, are allowed to operate with large amounts of debt, rendering them quite fragile. Exacerbating the problem is that banks are heavily interconnected, and when one indebted corporation fails, it takes down others with it; the 2008 crisis is a case in point.

The problem is global, but the U.S. provides a clear example. The U.S. government is central to how banks are able to get away with operating with such little equity. With the federal government prepared to support them through various bailout practices, banks find a strong incentive to borrow beyond their means. A recent example of that trend is Silicon Valley Bank, wherein the federal government took measures to guarantee that depositors would be made whole after the bank’s failure. This safety net that the government has consistently provided has, in effect, shielded banks from the downsides of taking on unsound risks. Better regulation is needed to require more equity so that banks would be prepared to absorb losses before being bailed out.

However, the current regulations — sponsored by the Basel Committee — are so complex that banks can weaponize and exploit them, spreading misinformation to shield themselves from accountability. Lobbying groups, like the Bank Policy Institute, are among the most powerful on Capitol Hill, ensuring that regulations remain lax, and banks continue to have the opportunity to game the system.

Banks hold disproportionate power in democracies and face limited political will to hold them accountable.