According to David Leonhardt, writing in today’s New York Times magazine,
TWO WEEKS AFTER THE ELECTION, Rahm Emanuel, Obama’s chief of staff, appeared before an audience of business executives and laid out an idea that Lawrence H. Summers, Obama’s top economic adviser, later described to me as Rahm’s Doctrine. “You never want a serious crisis to go to waste,” Emanuel said. “What I mean by that is that it’s an opportunity to do things you could not do before.” (Links in the quote are from the on-line original.)
Leonhardt explains how this Doctrine can be applied to issues ranging from health care costs to education, and some of this is already apparent in the fiscal stimulus details currently before Congress.
Can the same approach also guide actions regarding our deeply broken and broke financial system? There are three possible answers.
1. No. If you support this view, you presumably think (a) there are no powerful vested interests on Wall Street, (b) these vested interests are not a first order reason why we are in so much trouble, (c) these same interests are doing a good job leading us towards economic recovery. My guess is that this is currently the view of only a small minority; perhaps it is limited just to people who received large TARP-funded bonuses.
2. Yes in principle, but the situation is now so dire that we really don’t have the opportunity. In this view, the Wall Street interests are a problem, but we need to get credit flowing again as fast as possible, and this requires being nice to banks and bankers. If you think that maintaining or increasing the amount of nominal credit in the economy is the number one issue (e.g., for February), then this view may have some validity. But if credit is falling in part because creditworthy people don’t want to borrow as much as before and because desired savings are increasing almost everywhere in the world, then the case is weaker. Most likely, we have some time to sort out the banking system properly.
3. Yes, but how? Members of the incoming Administration have spent years thinking ahead about controlling health care costs and reforming education; no one really anticipated there would be an opportunity – let alone a potential need – to restructure the financial industry. Perhaps we should leave this to G20 reregulation, meshing with the Dodd-Frank legislative agenda at the national level? This might be part of the answer, but it doesn’t seem to match other proactive uses of Rahm’s Doctrine or the scale of the financial catastrophe.
Recent prominent actions on Wall Street – excessive risk taking, pervasive mismanagement, failure to take responsibility, mind-boggling bonus behavior - all point to a deeper underlying problem: no real owners. Large banks operate on the fundamental principle that it is all, “other people’s money.”
So it has been and so it is – except now it is very much taxpayer money, from the Treasury and from the Fed, that keeps large banks alive. In essence, the government is already the primary provider of capital to this part of the banking industry, i.e., we are in some fundamental sense already the owners, and if we provide more capital or insure/purchase more bad assets then we really own the store. (If anyone from a large bank would like to do without taxpayer support at this stage, please step forward.)
What should we do with our ownership rights? We will, no doubt, attempt to exercise greater control over executive compensation and bonuses – and the industry, no doubt, will evade the spirit of these controls quite effectively. We might impose some other symbolic restraints over corporate jets and the like, but none of this will be meaningful.
The only real way to apply Rahm’s Doctrine is to break the overly powerful vested interests in this part of the economy, and that means to break up the banks. The government needs to sell its effective control rights over large banks to private investors - providing them with at least temporary permission to become concentrated owners. Antitrust provisions must ensure that the large banks are dismantled in this process. Whether the executives stay or go is a matter for the new owners to decide. (For an example of how to organize the technical details of acquiring and disposing of government ownership, see our previous suggestions; there are other ways to do this that would also be quite straightforward.)
One pushback response to this proposal is: it’s too different, too risky, and there’s a good reason we’ve never been able to do this before. Fortunately, we have a serious crisis and Rahm’s Doctrine is in effect. And, really, it’s just an application to the US context of what other well-run countries have done when faced by a collective breakdown of bank executive competence.
Progress on the healthcare and education fronts will take many years, and the right way to measure success may well prove controversial. Progress on banking can be swift and the relevant metrics are straightforward – are the big banks broken up and placed under new, more effective ownership? And does the taxpayer finally get some upside?