Money and Financial Reform

Last week, Ryan Grim and Arthur Delaney wrote a story for the Huffington Post about the difficulty of getting substantive reform through the House Financial Services Committee. They focus on two main things. First, because a seat on the committee is valuable for fund-raising purposes, the Democratic House leadership seems to have stacked it with vulnerable freshman and sophomore representatives from Republican-leaning districts, meaning there are a lot of Democrats who are either personally inclined to vote with the financial services industry or feel a lot of political pressure to do so. Second, a lot of committee staffers end up switching sides to work as banking industry lobbyists, and some of them then come back to be committee staffers, raising the usual questions about the revolving door. Barney Frank comes off as something of a hero; the idea is that Frank and his senior staffers are so smart and skilled that they can get effective legislation through despite the cards being stacked against them.

There are just a couple of things I wanted to point out.

“[Former committee lawyer Howard] Menell and others claim that nobody used to bat an eye when staffers went to K Street and back. It was all part of the pro-Wall Street consensus that developed during the boom years. By contrast, the new climate is creating tensions on the committee. When the financial system collapsed last fall, the bipartisan consensus on Wall Street came down with it.”

Today, we’re seeing a partisan battle over financial regulation, especially the CFPA: progressive Democrats are for, every single Republican is against, and the battle is over the “moderate” Democrats. In a sense, this is a good thing. Because for most of the past two decades, instead we had a bipartisan consensus that what was good for Wall Street was good for America, which made it completely unremarkable that legislation was being written by people close to the industry. Remember, the landmark bills that people point to–Riegle-Neal, Gramm-Leach-Bliley, the CFMA–were products of Clinton administration and of a Republican Congress with usually smaller minorities than the Democrats have now.

“Frank laments staff compensation: ‘We underpay public officials. Particularly the staff. [Lawmakers] get a certain degree of non-monetary compensation — psychic. You know, I get mentioned on “Gossip Girl.”‘

“Staffers get a good look at how the other half lives; they rub elbows with lobbyists both at work (in meetings or even on extravagant field trips) and off the clock, during ritualistic happy hours. Those who attend know the unspoken rule: don’t talk too much shop but bring plenty of business cards. The friendly social scene helps explain why there’s not much condemnation from staffers for colleagues who leave for higher pay.

“”Everyone comes here to stand up for something they believe in, and at some point they go downtown to make money, and at some point someone they worked for draws them back [to the Hill],’ said a former staffer who works as a lobbyist. ‘It’s the running joke: a staffer gets married, you better go downtown! Spots open and one of the committee staffers has a kid. They’ll be moving downtown. Money is number one.'”

Individually, you can’t blame them. Private schools in DC cost around $25,000 per year. A lot of these people graduated from law school with $90,000 in debt (that’s around the average these days). But the fact remains that it’s a terrible system for the country. The money is in lobbying, and the environment erodes the qualms that people might have about it going in.

And it’s getting worse. In the 1960s, banking and law paid roughly like being a professor starting out; now they pay about 3-4 times as much, and the pay goes up much faster, too. This inequality problem we have is helping to erode our political system, among other things. Frank is right; we need to pay staffers more. I don’t see any way around it (except paying bankers, lawyers, and lobbyists less, and that’s not under public control).

By James Kwak

62 responses to “Money and Financial Reform

  1. “Individually, you can’t blame them.”

    Yes, you can. If money is all they care about, they can just get a job in finance or law straight out of school and stay there. They can compete in the industry like everyone else. It does not matter how much private schools in DC cost; they do not need to turn our political process into a personal networking opportunity.

  2. I’m sorry I’m gonna have to disagree with you on this one. Raising congressional staffers pay is going to do nothing to hinder lobbying. It’s not staffers’ pay that corrupts politicians, it’s campaign funds.

    People like Melissa Bean and Charles Schumer don’t vote based on staffer pay, they vote based on direct contributions to campaign funds. And even if they did raise staffers’ pay, the comparative advantage in pay would still draw away the talent. They’ll never be able to come close enough to K street salaries to even make them ponder staying put.

    That’s a red herring. And I don’t buy this self-effacing “I get mentioned on ‘Gossip Girl'” crap either. Barney Frank got $387,749 from the financial sector and more then any other Congressman from the hedge funds. Frank can pull that “Gossip Girl” bullshit if he goes on “Dancing With the Stars”, maybe they’ll buy that rubbish.

  3. Here’s my source for that campaign contribution number for Barney Frank. He’s at number 15 in the top 15. You can peruse the rest. Charles Schumer of New York is #1. Again this is JUST campaign contributions from the financial sector.

    http://www.huffingtonpost.com/2009/11/17/the-15-biggest-congressio_n_360514.html?slidenumber=62T%2FESScAaI%3D

  4. Publicly-financed campaigns might be a more efficient way to solve this problem than paying staffers like bankers.

  5. The disparity between public and private salaries has always been there, though not so dramatic as now.But why blame the underlings? It’s the guys in the front seats who do the voting. The greatest problem is the campaign contributions they get. As soon as the Supreme Court removes limits on corporate contributions (which they are hourly expected to do) because corporations don’t have enough influence in Washington, there will be no hope at all of having the public be heard. We just went through trying to get a public option which over half of the country wanted, but the insurance company lobbyists wouldn’t allow it. The revolving door is just a little distasteful sideshow.

  6. I think now that EVERYONE in America realizes how deleterious the financial lobbyists are to the health of this nation, it’s time for a major, national paper such as the New York Times to create a whole new section of their paper devoted to “exposing” which politicians are receiving what from whom. I’m talking a weekly, if not daily, column that keeps tabs on all these elected creeps and their Wall Street benefactors. Only then will these legislative whores have nowhere to hide and start acting in the best interests of the country.

  7. From China Financial markets blog,

    http://mpettis.com/2010/01/everyone-wants-to-talk-about-currencies/

    …..a very perceptive quote from Professor Jiang Gaoming of the Institute of Botany under the Chinese Academy of Sciences:

    “All living creatures have an instinct to survive. When a bad system determines the survival of researchers, they have to do all kinds of corrupt and unethical things to live. The outcome is inevitable,” Jiang wrote.

    This is something I often tell my students, especially about the banking system. It is not because they are especially stupid or dishonest that bankers have made bad loans, but rather because they are responding intelligently to bad incentives. Any system with distorted incentives creates distorted results.

  8. It might help if we moved the nation’s capitol to Wyoming.

  9. We should have a re-org: Break up Washington DC and restribute the parts, especially the agencies, to the state capitals. Give the Senate something to do. Ha ha, only serious!

  10. So the banking committee is dominated by Democrats owned by Wall Street, but somehow the problems are all the Republicans’ fault?

    And Barney Frank is our last, best hope?

    Oh, I see; the Huffington Post is a comedy publication. Almost got me.

  11. (Off-topic) Ted K – Regarding your post on AIG, did you consider that Geithner was in the process of being nominated as Treasury Secretary when the decision was made not to disclose the CDS information? (You might consider allowing comments on your blog…)

  12. Clearly you’ve never worked with somebody who makes 2-5x what you makes. Doesn’t take long looking at their 7 series BMW from the window of your Pontiac that you wonder what you are doing in your current career. Given that the skill sets for a hill staffer are roughly the same for a lobbyist or a lawyer at a firm and you get the revolving door.

    I’ve dealt with the issue of pay disparity and it really does all come down to money.

  13. Yet another clarion call:

    To Mssrs. Johnson, Kwok et al.

    Congress is returning soon and the Senate will consider the jobs bill that the House passed before the Christmas recess. This bill must pass!

    I urge you(beg you, to be truthful) to NOT provide any political cover whatsoever for the deficit hawks in Congress who will argue against the extension of the Federal UI programs as well as another stimulus package that will prevent the unjust and savage budget cuts being prepared by state governments all over the country.
    As has been pointed out many times, the US had debt, I believe, that was 250% of GDP at the end of WWII, and the world did not come to an end. This should provide at least one argument against the deficit hawks(who, in addition, didn’t object to Bush’s deficits as I’m sure you know).
    Also, it is not necessary to choose between infrastructure projects and the extension of Federal UI and the rescuing of state budgets.
    The writers on this blog are very influential, and I ask you to play a strong role in making sure that millions, perhaps even tens of millions of men, women and children are not thrown into poverty through no fault of their own. Further, as good neo-Keynesians, I know you’re aware that unless aggregate demand is maintained, this immiseration if it’s allowed to occur, will most assuredly up the odds to near-certainty of the second Great Depression we’ve so far managed to avoid.

  14. I do understand that feeling. It is what keeps junior staff working long hours at investment banks, even though the work is extremely punishing.

    But I do not think that is a realization that people just stumble upon (money either means something to you or it doesn’t), and they do have a choice of where they work. They do not need to exploit the political system to get ahead. They can just go work in the industry.

  15. Sorry about the mis-spelling, Mr. Kwak.

  16. I believe that was made quite clear in the post if you read it. The treasury spokesman who is quoted in the post makes that quite clear, not to mention other facts in the Bloomberg story.

  17. Indubitably.

  18. Dick Cheney was raised in Casper, Wyoming. Be very very careful what you wish for.

  19. So why don’t they just ban private schools and distribute kids randomly (within say 20 click range) in elementary schools? Then everyone has an incentive to make sure the public school system is running well, staffers don’t have to worry about school fees and the private school teachers become available.

  20. Let them eat cake.

  21. Are you ready for this? Of course the “Treasury” is not really the “Treasury”. It’s just Stupid Geithner & the greedy bankers he has hired to do his dirty work.

    http://jessescrossroadscafe.blogspot.com/2010/01/us-government-is-eyeing-your-401ks-and.html

    Simon & James please comment. Thanks.

  22. Half want the public option, please state your source.

  23. Meaning what exactly?

  24. Are you serious? As Bond Girl says, if money means that much to them then go to the other side. You know why they don’t…because they don’t really have the skills or tools because if they did they would get the money.

  25. exactly. This is a political disease with financial and economic symptoms.

    I suggest holding special interest groups to the same campaign contribution limits as a natural born person.

  26. Financial lobbyists? Don’t forget pharmaceuticals, unions, energy, defense, etc.

  27. Doesn’t work. Have you noticed that most states’ capitols are not located in the largest city in that state? And that they created a capitol city out of a swamp when the country was founded?

  28. Yes, it is the Republicans fault. And the Democrats fault. If you think that one party is innocent (or the solution to this problem) you need to wake up and smell what you’re shoveling…

  29. Maybe if they had better fire control, they could save their ammo for the next fire mission…

  30. PACs—Political Action Committees were a way to weasel around campaign funding laws. We basically have guys like Newt Gingrich and our boy down in Texas Tom Delay to thank for all that.

    Our beauty queen from Alaska is going to see what she can muscle up with her PAC. Unfortunately we have enough illiterate people in this country, even if she doesn’t familiarize herself with issues (which she won’t, because she’s too lazy) she will be a legitimate threat if she runs.

  31. Bryan, do you often find you’re the last one to laugh at a joke in group settings???

  32. 1. Afghan officials are critized for corruption.
    2. With the clout of lobbys, are we falling into the default position of “Taxation without representation”? Could lobbys be taxed proportional to their representation?

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  34. Indeed, agreed!

  35. Throw in some greasy noodles, a zipper that never works, fake label–and it’s a deal. I Leally Leally rike you style.

  36. James: “I don’t see any way around it (except paying bankers, lawyers, and lobbyists less, and that’s not under public control).”

    Then let us just get it under public control!!!!

    We have a federal minimum wage (stagnant for a decade, just recently raised to $ 7.25 per hour).

    The income inequality has become very detrimental to the cohesion of society.

    We are now more than one-and-a-half year into this crisis and NOTHING has changed vis a vis bonus banksters.

    We apparently need, at least temporarily, a federal maximum wage. Everybody, and that includes business people, self-employed, can not earn more than $ 300.000 per year (i.e. 20 x minimum). Employee benefits in natura are calculated to a cash equivalent. Anything above the MAXIMUM INCOME is taxed at 100%.

    I am really sorry, but radical times apparently need radical solutions. The route taken by Wash.DC and Wall Street (wealth transfer from the middle class to the extremely rich oligarchs) leads to disaster.

    P.S. to James:
    In my comment on Simon’s post regarding ‘countdown to Goldman Sach Bonus day’ I selected a quote from this Huffpost article, which indicates that the problem is WORSE, than suggested by your selected quote. It is not just staffers, but ALSO the members of Congress, sometimes erroneously referred to as ‘representatives of the people’.

    copy from my comment Jan. 8th:
    “The banking committee is the second-largest in Congress and is known as a “money committee” because joining it makes fundraising, especially from donors with financial interests litigated by the panel, significantly easier.

    The Democratic leadership chose to embrace this concept, setting up the committee as an ATM for vulnerable rookies. Eleven freshman representatives from conservative-leaning districts, designated as “frontline” members, have been given precious spots on the committee.

    In short, by setting up the committee as a place for shaky Democrats from red districts to pad their campaign coffers, leadership made a choice to prioritize fundraising over the passage of strong legislation!!!!!!!!!!!!!

    http://www.huffingtonpost.com/2009/12/29/the-cash-committee-how-wa_n_402373.html

    please read the rest (very interesting, and depressing) and realize that there is no h o p e that congress will ever c h a n g e. “

  37. I believe you and I are in violent agreement.

  38. Ted K you are right on…campaign financing is at the root of the evil that pervades Congress and Executive

  39. Red Leg you are correct…Americans must remember that nation states fall from the corruption and plutocracy from within, not the supposed big bad bear that fear and security and propaganda on the outside.

  40. Before I had kids, I think that I too would have roundly condemned the staffers. A great deal changes when children enter the scene – you can sacrifice your own future, but it’s incredibly painful watching your kids grow up without the advantages that other kids have (especially those of your direct peers) – better schools, summer camp activities, sports, academic programs, after school programs, etc.

    One inevitably faces the question, “Why must my children pay such a heavy price so that I can do a very small part to make life better for people who really don’t give a darn.”

    But by then, you are locked into a highly competitive political career.

    I have to think – it’s the same question someone in the military must ask. Except that at least their kids grow up with everyone around them thinking their dad (or mom) is a hero; when your dad is a Congressional staffer, you don’t get the same respect.

    And even then, children in military families (with parents who do regular tours) have higher rates of problems than kids in non-military families.

  41. Every parent who is not filthy rich laments not being able to provide their children with every advantage in the world. I’m sorry, but I am really at a loss when it comes to seeing how this justifies selling out to K Street. I’m sure it gives their children a great sentimental education, however, which is no doubt reinforced at DC private schools.

  42. Over time every governmental institution becomes sclerotic. The US legislative system while sclerotic is less sclerotic than the moribund nature of the electoral process. In the next four to five months it would be quite possible for the electorate to provide a way to ream out a good deal of the sclerosis.

    The simple political reaction required of the citizenry is to vote in upcoming primaries against any incumbent running for re-election. Toss the incumbent from being your party’s entrant in the general election. A ten percent deliberate shift in votes due to anti incumbency views would marginally decrease the vote of the incumbent 20 % no matter where the anti incumbency vote is spread. It may require a run off election but even if the incumbent wins a strong message will have been sent. A 20 % anti incumbency swing in all primary contests will never happen but iff it did every incumbent up for re-election would be either a loser or be required to survive a run off. A nationally half successful effort would toss a very high plurality of incumbents.

    No greater message about change could be made.

    What is required is that those who do not usually vote in a primary decide to do so and follow up by voting anti incumbency.

    Will this happen? I doubt it very much because the electorate is too uninformed or uncaring or both to generate an anti incumbency voters revolt.

    At the end of the day, a simple , easy and effective political device for correcting a sclerotic Congress is available. If the recipients of elected office that result from such a citizen revolt do not heed the result it means there is no effective political correction other than collapse of the political system over time.

    There would be no other remedy. But the point is that a remedy does exist.

  43. What really scares me is what happens AFTER a potential collapse of the US government. Way too many vocal nutjobs out there, more right than left IMO, that understand Dr. Goebbels a little too well for my liking.

  44. So now what do we do with all of this “muck”?

  45. Good question…

  46. Disagree. If you come up with the next big thing, you should have the option/incentive of making billions.
    However, if you make billions through FRAUD, then clawbacks are in order in addition to criminal punishment.

  47. Oh you were being funny…another interesting response Ted K.

  48. The problem with this is that often the primary challenger to the incumbent is worse than the incumbent.

    I think that a more representative Representative needs to get elected from each constituency. Meaning that (by and large) the people who would best represent a given population are not even running for office because of the money and character assassination involved with actually running.

    How many school teachers are in Congress? Engineers? Bankers?

    Douglas Adams had it right: http://www.brainyquote.com/quotes/quotes/d/douglasada125021.html

  49. It could be a temporary measure, until the radicalness of the situation has been diminished.

    But thereafter, even the inventor of the next big thing does not need a billion dollars (it is not that one can take it with him in the afterlife).
    Wasn’t the US in a much better shape with a 70% marginal tax rate for the very, very high earners, and with a decent estate tax rate?!

  50. This is the first time in years I’ve heard anybody cite Rasmussen with a straight face.
    Majority support for a public option has been a fact throughout this debate.
    “On the issue that has been perhaps the most pronounced flash point in the national debate, 57 percent of all Americans now favor a public insurance option, while 40 percent oppose it. Support has risen since mid-August, when a bare majority, 52 percent, said they favored it. (In a June Post-ABC poll, support was 62 percent.)”
    –Washington Post, Most Support Public Option, Polls Find Oct. 19, 2009

  51. By “better schools”, I don’t mean private schools. I mean affording a home in a district with better public schools – and the difference between good/bad public schools in DC is not a triviality.

    You cannot afford a home in a district with really good public schools on a Congressional staffer’s pay, even a tiny home, and you can’t afford extracurricular programs even though your schedule implies working 12 hour days and many weekends.

    It’s easy to criticize from the outside. Being a Congressional staffer is NOT a family friendly job, which skews the people in service dramatically. It also skews the composition of the home town staff vs. the DC staff.

    One of the mantras of public administration is that the pay should good enough that those who serve are not tempted by _necessity_ to take bribes of any sort, even “legal” ones, but pay should not be too good. (temptation by vice is different than temptation by necessity)

    I think the example of watching a BMW 7 series out the window is a poor one – many of the folks who go down to Congress (at least on the Democratic side) are not motivated by wealth. But I know a number of competent folks who have left/avoided DC congressional jobs because there’s:

    A) No stability to raise a family
    B) Lousy hours for a family
    C) Can’t afford to get into a decent school district

    Contrast this with Federal Civil Service jobs, which are quite different these days. The better folks thus go for jobs in consulting firms, try to stable jobs at places like CRS (congressional research service) or the CBO, or even certain NGOs. Just look at the age distribution of staffers – usually, only the most senior aides are over 35.

  52. Does the name Bond Girl have something to do with making bail bonds available to the less fortunate?

  53. My point is that only a mechanistic type approach might possibly induce a change in a failed institution called the Congress of the United States. That is if the institution has failed. I tend to agree with Barney Frank that Representatives are in fact representing factions in their district like auto dealers. Those that see a gross failure do so from an empty assumption that the individual is to be represented. That has never been the case because individual representation is not possible. Only factions may compel their share of representation in the real world. Those that take umbrage at the normal seeking of a group compelling their interest really are mad that they cannot compel their interest representation. Here, the political flaw of American Democracy rears it’s head. Masses of citizen’s cannot compel their representation because they are literally against giving up sufficient personal views as to be able to even form a faction to compel their representation. We have always had this problem and I view it’s roots as being Natural result of Protestantism.

    Right now, does it matter who we elect if views about the financial system are even somewhat correct? The individuals in Congress must be compelled to put massive credence in the views of those they now ignore. They must be compelled to fear you as a group more than they love the money of Wall Street.

    Are American’s now incapable of commonwealth on a national scale?

    What real world device of the moment could possibly compel Congressional elected members to abandon those that nurture them for those that only antagonize them ?

  54. I didn’t make the point, I just found a credible source that backed the original post in about 0.2 seconds…

  55. i agree that the upper end member tax rates are too low, but there must be incentive to make an honest profit however obscenely large it might be. The 70% margin for the top 0.01% of incomes is fine by me because i’ll probably never get there. But take the opportunity away and I’ll never try to get there.

  56. The ultimate grass roots capture is happening because we don’t live in a true democracy, we live, in fact, in a plutocracy (not far from the Soviet model, since the “free” press is largely a captive audience). That is why the average citizen’s income is under siege by big money, seemingly in perpetuity. That is, until some smart, charismatic figure (like Barrack Obama) has the guts to move the agenda in a different direction (unlike the President). Regardless of what the forecasters say, we are headed for a “second dip” as large as the first (see PBS News Hour report yesterday on state budget shortfalls). After the further threatening erosion of the middle and lower classes (look at unemployment amongst minorities and men) incomes and future earning potential, we are living in the time of a real potential for a second French Revolution (since the society now looks like France in the late 18th century). Congress may find themselves challenged by a new group of independents who swear off campaign contributions and gain broad popular support by doing so. It only takes a couple to be successful in this way to start a mass exodus from the major parties.