The Importance Of Elizabeth Warren

By Simon Johnson

One of the most important results on Tuesday was the election of Elizabeth Warren as United States senator for Massachusetts. Her victory matters not only because it helps the Democrats keep control of the Senate but because Ms. Warren has a proven track record of speaking truth to authority on financial issues – both to officials in Washington and to powerful people on Wall Street.

During the campaign, Ms. Warren’s opponent and his allies made repeated attempts to portray her as antibusiness. In the most bizarre episode, Karl Rove’s Crossroads GPS ran an ad that contended that she favored bailing out large Wall Street banks. All of this was misdirection and disinformation.

Ms. Warren has long stood for transparency and accountability. She has insisted that consumers need protection relative to financial products – when the customer cannot understand what is really on offer, this encourages bad behavior by some companies. If this behavior spreads sufficiently, the entire market can become contaminated – damaging the entire macroeconomy, exactly as we have seen in the last decade.

Honest bankers should welcome transparency in all its forms. And the Consumer Financial Protection Bureau, which Ms. Warren helped to establish, has made major steps in this direction. Ms. Warren has strong support from the progressive wing of the Democratic Party, and her pushback against sharp practices by big banks resonates across the political spectrum. (Disclosure: James Kwak and I wrote positively about Ms. Warren and her approach in “13 Bankers.”)

She has also established an impressive track record for effective oversight in Washington. As the chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program, she drew bipartisan praise (until, of course, she decided to run for public office).

How much can a new senator accomplish? Within hours of her victory, some commentators from the financial sector suggested that no freshman senator can achieve much.

This is wishful thinking on their part. A newly elected senator can have a great deal of impact if she is well informed on relevant details, plugged into the policy community and focused on a few key issues. It also helps if such a senator can bring effective outside pressure to bear – and Ms. Warren is a most effective communicator, including on television. She has an unusual ability to cut through technical details and to explain the issues in a way that everyone can relate to.

Ms. Warren is a natural ally for Senators Sherrod Brown of Ohio, Jeff Merkley of Oregon, Carl Levin of Michigan, Jack Reed of Rhode Island and other sensible voices on financial-sector issues (including some on the Republican side who have begun to speak out). My expectation is that Ms. Warren will work effectively across the aisle on financial-sector issues without compromising her principles – and this could really be productive in the Senate context.

Hopefully, Ms. Warren will get a seat on the Senate Banking Committee, where at least one Democratic slot is open.

President Obama should now listen to her advice. Senator Warren should have been appointed head of the Consumer Financial Protection Bureau in 2010 – but was opposed by Treasury Secretary Timothy Geithner. Unfortunately, the president was unwilling to override Treasury.

If President Obama wants to have impact with his second term, he needs to stand up to the too-big-to-fail banks on Wall Street.

The consensus among policymakers has shifted since 2010, becoming much more concerned about the dangers posed by global megabanks; that has been clear in recent speeches by the Federal Reserve governor Daniel Tarullo; Richard Fisher, president of the Federal Reserve Bank of Dallas, and Andrew Haldane of the Bank of England (all of which I have covered in this space – including last week).

At the same time, we should expect a renewed pushback against all recent attempts at financial-sector reform – a point made by American Banker, a trade publication, immediately after the reelection of President Obama.

Scandals of various kinds will be thrown into this mix. The full extent of money-laundering at HSBC is only now becoming apparent. Complicity of various institutions in rigging the Libor should also become clearer in coming months. No doubt there will be big unexpected trading losses somewhere in the global banking community. The European macroeconomic and financial situation continues to spiral out of control.

Senator Warren is well placed, not just to play a role in strengthening congressional oversight but in terms of helping her colleagues think through what we really need to make our financial system more stable.

We need a new approach to regulation more generally – and not just for banking. We should aim to simplify and to make matters more transparent, exactly along Senator Warren’s general lines.

We should confront excessive market power, irrespective of the form that it takes. We need a new trust-busting moment. And this requires elected officials willing and able to stand up to concentrated and powerful corporate interests. Empower the consumer – and figure out how this can get you elected.

Agree with the people of Massachusetts, and give Elizabeth Warren every opportunity.

An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission.  If you would like to reproduce the entire column, please contact the New York Times.

49 thoughts on “The Importance Of Elizabeth Warren”

  2. Obama threw Elizabeth under the bus. He should have thrown Timmy under the bus and we all would be a lot better off if he had. Timmy would just have gotten his $1,000,000 job at Goldman a little sooner and TBIF would be gone by now.

  3. Nemo I had a good laugh when I read that she had also plagiarized recipes for the Pow Wow Chow cookbook. When looking for purity in politicians these are skeletons I can live with.

  4. There is no point in talking about reform as long as the TBTF banks are allowed to remain intact, and the zero interest rate policy continues to punish savers and pension funds. When Obama choose Jim Leach as his first economic adviser, his subsequent choice of Geithner should have been no surprise to anyone. Obama, of course, chose nobody. Those choices were made for him.

    If Fuld is chosen to take Geithner’s place, then the corruption continues. If Krugman is chosen to take Geithner’s place, or if Krugman gets the nod to take Bernanke’s place, expect an even more rapid decline of the dollar. Having Warren in the Senate will make little difference.

  5. This is a sweet moment. I became a fan of Elizabeth Warren when finding her book “Two Income Trap” in the library (honest!) about 7-8 years ago, and began telling just about everyone I met about this great book. Imagine my delight when Reid fingered her for the watchdog position.

    But this last step (to Senator) is just heavenly. Makes the sensible and knowledgable have reason to feel some longer term optimism. A nation that elevates competent people like Warren has a reasonably good shot for long-term success.

  6. Its quite straight forward.
    The Banks knowingly created sub-prime mortgages by not checking things like income and assets on the mortgage application forms. So there should be jail time for that.

    Then Standard & Poor was given Billion Dollar bundles for rating. They they were junk, they have internal emails where they called them shit. But they still rated the bundles AAA. There should be jail time for that,

    So far all we have seen are bailouts so the executives can continue paying themselves huge bonuses.

    Elizabeth is the person who can bring some integrity to the banking system by putting the DoJ on their tails. We have to see these guys behind bars to know that people like Elizabeth Warren are making a difference.

  7. Of course one single voice can be extremely important, if listened to.

    Though she has not seemed too much interested in the subject I sure wish I could convince Elizabeth Warren to ask all those involved with the Dodd-Frank Act the following two wicked questions:

    When do banks most need capital, when the risky turn out risky, or when the “not-risky” turn out risky?

    When favoring with very low capital requirements so much the banks doing business with “The Infallible”, are we not forgetting that those were “The Risky” of the past?

    http://subprimeregulations.blogspot.com/2012/07/complaint-i-presented-to-consumer.html

  8. Honest bankers should welcome transparency in all its forms.

    This is a statement that Simon will wish he had omitted. I have no i’ll wills against Ms. Warren or her perceived accomplishments, I am certain they have more integrity than most congress people of today. Unfortunately for Ms Warren, (and could this be a prelude to America’s near future), she has over worked her body mechanics doing all that, and her country is well on its way to collapsing after having positioned herself with the forward thinking, like minded crowd. Holding down tables and demanding austerity from opponent’s is a weak bargaining position, which gets many laughs behind closed doors and has an endless timetable. The competition will eat her for breakfast and continue their day without a hitch, and she will tire from all the linear created resistance. It will take more than Elizabeth Warren to curtail his ambitions, trust me, I’ve been their, and done that.

  9. “Karl Rove’s Crossroads GPS ran an ad that contended that she favored bailing out large Wall Street banks. All of this was misdirection and disinformation.”

    This is Rove’s modus operandi. People need to figure this out and use it against him. The way to do that is to immediately assume that if a candidate has any issue that recommends them to voters, Rove will claim that issue for his candidates, and try to bludgeon the opposition with it. You’ll want to be way ahead of the curve, before he has a chance to steal your mojo.

    Two more examples: At the end of the campaign, Romney made the claim that Obama had shipped auto jobs overseas. That’s despite the fact that the GM takeover and restructuring, before pushing them back into the private sector, was one of the most astute acts of industrial policy the country has seen. This failed miserably thanks to a concerted effort in Ohio, Wisconsin, and Michigan to reveal that lie for what it was.

    And just yesterday, Rove claimed that the Republicans lost because of voter fraud on the part of Democrats. Outrageous and brazen, no? Democrats were still queued into long lines in Florida early Wednesday morning because of Republican shenanigans. It just takes your breath away.

    The idea is to implant into the public mind a a relationship between an issue and a candidate. To do that, uses his advertising dollars, and that of the often oblivious news/infotainment media, to broadcast that conception on a given issue.

    He is a purveyor of the big lie, one who couldn’t have learned his lessons any better had he studied at the feet of the master himself, Josef Goebbels.

  10. Mr. Kurowski, I’d like to recommend to you this website:

    http://www2.econ.iastate.edu/tesfatsi/afinance.htm

    I’ve only recently become aware of the revolution going on in macroeconomics. This site is packed with very good critiques of the half-measures taken to date, and of the problems with leverage ratios and the Basel agreements in general.

    There are also very timely recommendations for what to do. I’d especially recommend Andrew Haldane’s papers and the blistering put-down of financial economics by William Buiter that appeared in the Financial Times.

    We are in largely uncharted waters here. The collapse in 2008 seems to have changed the terms of the debate, with classical macroeconomics on the retreat. The efficient market hypothesis has been trashed quite badly, and there is now a broad and very galvanized coalition calling for data-based analytical methodologies.

    The rational agent hypothesis, adopted largely as an act of computational convenience, has been revealed to be near-useless given that it doesn’t in the least reflect the heterogeneous set of players and instruments in most modern markets. In an age with this much computational power, to rely on such rigid assumptions is tantamount to an act of scholarly suicide.

    It appears that a new day is dawning.

  11. For the new day…Could Baseline Scenario please name some suggested replacements for the primary and secondary economic officials in a new Obama administration?

  12. @ Norm, always GREAT reading your posts. I think the most encouraging news out of this election was a large portion of the electorate rejected the Rove approach, and saw through the massive lies of Romney, either via the stump, or his mendacious ad campaigns.

  14. Thank you Norm. I will have a look at it. I am well aware of Andrew Haldane’s arguments. For me he is correct pushing for the simplification of regulations in quite general terms. What he has not done yet is to take up the flag of how much distortions the current capital requirements based on ex-ante perceived risk signify… I guess he does not feel he can criticize his colleagues on more than one front at the time.

    The “efficient market” had no chance to function when bank regulators, thinking themselves the risk managers for the world, intervened with their risk-weights.

  15. I felt the media was doing more “fact checking” this time.

    Karl Rove got George W. Bush ahead of John McCain in the primaries 12 years ago by creating a story that John McCain used illegal immigrants to clean their house. It was a total fabrication which helped George.

    Then with George against John Kerry 8 years ago, Rove created the “Swift Boat” scandal to make John Kerry who was a war hero into a coward. Meanwhile, George who did not show up for National Guard Duty was made into some sort of moral stalwart.

    I think for the first time the whole process has backfired on Karl Rove who got in a fight with Fox News about Obama’s victory. Maybe this is the last we will hear of him.

  17. Ah, Ms. Warren, the latest great white hope. Of course, my feeling is that she would make a good president, and, maybe someday. For now, as you so cogently point out, she can and will have a major impact on the Senate. The nice thing is that she shouldn’t have to spend much time on fund raising (owing to her innate popularity), and should be able to spend a great deal of time working on and formulating legislative efforts, as well as building a fantastic staff. I wish her all the luck, pray for her efforts, and deeply believe that she will be a force to be reconned with for many years.

  18. If Ms. Warren turns out to be half the threat that she is made out to be she will have to spend time fundraising because the amount of resources the opposition could throw at her would be considerable. (As a side note some committee assignments are more fund raising friendly than others, for whatever reason).
    Sheila Bair could be wonderful for Tres. Sec. Repubs would have to go out of there way not to confirm her and all of the dissatisfied Obama Dems would give Obama a chance at redemption. Her selection seems so obvious to me that I’m fairly certain it will never happen.

  19. I think Rove’s time on Fox News may be coming to an end.

    The worst case I saw was “Stormin Norman” Swartskoph who was asked for his opinion on CNN about how long the war would last. This was in 2003 just a few days before the invasion. He said the war would last about a week.

    You know he has never been on CNN since. The guy just dropped out of sight.
    Wouldn’t it be great if this happened to Karl Rove..

  20. Senator – elect Liz Warren, such a nice ring to it.

    Anyhow, a formidable campaign staff built up around her candidacy and this is a major factor in her substantial win over the gop fella.

    He went negative early on about Liz’s heritage and family, and this turn ed me off a great deal, as I imagine it did many Bay State voters.

    Hello Bayard.

  21. I don’t think i’d lump in HSBC…which was sullied by American slimeballs…do they come any other way?…with all those worthless American bankers and their banks. worst people on the planet…I hope they all DIE and take New York City with them.

  23. I second mike’s nomination of Shiela Bair as Treasury Sec, but don’t hold your breath. Her chances are about as good as Krugman’s to be named head of the NEC.

    OAS, let’s all agree to eliminate the word “mandate” from our political vocabulary. The roadside is littered with the burned out wreckage of policy initiatives allegedly given electoral mandates, from the privatization of Social Security by Bush, to Gingrich’s budget showdown in 1995, to FDR’s court packing scheme. With few exceptions, mandate = hubris = epic fails.

    By all means, O has won an endorsement for some issues that were at the center if his campaign, but claiming a mandate is asking for trouble.

  24. Elizabeth will have no trouble raising money. She’s a rock star and the Party will defender her for the icon she has become. Besides, she will raise tons of money via online contributions from small contributors across the country, and she’ll do it without spending all that time in an endless series of fundraisers and traveling to get to them.

    And for those of you who can’t get past the Native American heritage thing, who holds whose scalp now? I’m glad this squaw’s in my corner.

  25. I sent Elizabeth money regularly even though I live in California. Maybe it was because our family “myth” is that our great grandmother was a full blooded Cherokee. I wonder if my brothers and I can start a casino?

  26. As a banker very proud of my colleagues and my industry, this is one place i agree with Simon boy. We absolutely need more folk like Elizabeth Warren in congress as we need folk like Scott Brown. it is a pity that moderates like scott brown have no place in modern America.

    Instead of the monstrous and confusing dodd-frank pile of garbage, had Warren been in congress, we would have got legislation that made sense, worked and actually resolved the problems that gave us the financial crisis.

    Although i hope she does not align with Carl Levin who has consistently shown his lack of knowledge and ignorance of the industry he is trying to fix. Carl is more focused on drama, hype and “..shitty..deals” than real actual issues.

  27. Chinki, at the risk of taking seriously a post that is tongue-in-cheek, I’ll complement the moderate tone of your comment. And you’re right that Dodd-Frank is deeply flawed thanks to GOP and Treasury/WH opposition to Kaufman’s (D-DE) too-big-to-fail amendment, although as Simon and James have said, it’s a step in the right direction.

    But, when you lament the loss of moderates in Congress like Scott Brown, do you mean those who are wholly-owned subs of the megabanks. The significance of the Warren-Brown race had less to do with their place on the ideological spectrum and more to do with who pays their campaign bills.

    Re Carl Levin, I worked in the Senate for a conservative Democratic and dealt directly with Senator Levin. I promise, he’s one of the smartest people on the Hill.

  28. Well spoken Mr. Johnson, and a thousand thanks for your stalwart support, advocacy, and defense of Elizabeth Warren. We all wait with bated breath for her impact on the next congress. Hopefully she will inspires others to begin to right the arduous wrongs of TBTF oligarchs run amuck! The predatorclass must be held accountable, they must play by the rules and conduct their business in good faith and beholden to the rule of law, and they must pay their fair share in taxes both individuals and the titanic oligarchs. We can only hope the predatorclass days of raping and pillaging the economy and the American middleclass will soon come to an end.

    Bravo Massachusetts!!!

  30. I must have missed that issue of People magazine, Michael.

    Time to lower expectations for what Elizabeth can achieve walking in the door. She’s only one of 100 Senators and 535 Members of Congress, and she doesn’t run the Justice Department, so she won’t be indicting any bankers. Reid will probably put her a good perch on Senate Banking, and she’ll arrive with great credibility among her Dem colleagues (and something akin to disguised loathing by the Repubs). But expertise is not enough to have an effect in the Senate. It’ll take her awhile to establish her chops as a lawmaker.

  32. I was very disappointed to see Elizabeth Warren jump on the Middle Class Only bandwagon. She knows that it isn’t possible to preserve a middle class in the US while refusing to legitimately address poverty. Millions of us are now (thanks to Clinton’s welfare “reform”) a single illness/job loss from losing everything, with no way back up. Focusing on the middle class alone makes as much sense as putting all your work and resources into redecorating your living room while ignoring the crumbling foundation of the house — that whole house is going to come crashing down, no matter how pretty the living room looks.

  33. How about addressing “poverty” from the viewpoint of an economic system where 480 USA citizens are worth a collective total of 2.08 Trillion?

  34. One very little tough wicked question Elizabeth Warren should make is:

    Has anyone around here seen where we can find a definition about the purpose of our banks that we can all agree with? I mean, without that… how on earth can we regulate the banks?
    http://bit.ly/UtsH8a

  37. Re: How do we regulate?
    I agree it is to difficult to watch over complex derivative trades and make then stop before they blow their brains out.
    The best thing is to make them small enough to fail and let them fail. I think after a few CEOs are put in front of their depositors and shareholders to explain how they lost their money, they will get the idea about self regulation.

    The key thing is “no bail outs”.

    Also jail time instead of bailouts will also instill a change of attitude of the bank CEOs who are not behind bars.

  38. “The best thing is to make them small enough to fail and let them fail.”

    On that I completely agree… in May 2003 in a workshop of some hundred bank regulators, as an Executive Director of the World Bank I told them:

    “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size”

    But they would never dream of listening to someone outside their little mutual admiration club.
    http://subprimeregulations.blogspot.com/2007/06/some-comments-made-at-risk-management.html

  39. Beyond the problem of moral hazard and serial taxpayer bailouts that TBTF poses, there’s the matter of concentrated political power that enables the banks to perpetuate their government guarantee thereby giving themselves a competitive advantage and largely exempting themselves from the discipline of market forces. A by-product of these political effects is the corruption of our political institutions and the erosion of our democracy.

    One might argue that these political consequences are more significant than the economic costs of TBTF, especially in the context of the threats posed by Citizens United and even more destructive campaign finance cases sure to come, systematic voter suppression, and now, an assault on the pre clearance provisions of the 1965 Voting Rights Act.

    The election of 2012 was damn important, but until election reform and some meaning controls on money in politics are enacted, and the Supreme Court is secured, the plutocrats and their Tea Party/Christian Right allies are a clear and present danger.

  40. True that publiustex! You’re nicer and more eloquent than I, but we’re exactly on the same page.

  43. She has to live up to all the hype she’s getting, including this, and judging by some of her positions, she has a somewhat wobbly moral compass. We’ll see.

  45. god
    do any one of you people remember being dissapointed by Obama ???
    Already, yesterday, in her first press conf, she is starting to sound like, a politician running for re election, and mindful of the people with big bucks.
    (see todays boston globe)

    Maybe she will be good, maybe not; her “signature” accomplishment, the CFPB is not so hot: what i read on, say, naked capitilism, most of what the CFPB has done to date is wishy washy.

    you people don’t seem to understand that this is a constant, day in day out 24/7 struggle, and almost all people who get sent to DC get corrupted; now that she is Senator Warren, it is a 24/7 job to keep our eyes on her, and make sure she stays true and doesn’t get corrupted

    as a MA liberal, I was disgusted because the party steamrolled over the other candidates who were running in the primary; instead of a primary, warren was nominated at the convention; the other candidates, who had worked hard, were just blown off.
    because of this disgusting display of machine politics, i don’t have a good feeling towards her

    I would also say, that the party steamrolled over the other (quite qood) candidates, so that there was no primary fight turned out to be bad: warren learned how to campaign during the general election, in the full media glare, and let me tell you ,learning on the job while the TV cameras are rolling is NOT a pretty picture.

  46. So, Elizabeth has one “bad” press conference and you’re ready to declare her a sellout? What, you didn’t like her short answers and caution in answering a whole new set of questions from those she got on the campaign trail? How much time have you spent in front of the media as an officeholder?

    And I suppose the fact that the GOP has refused to confirm Obama’s appointees and the GOP House has underfunded and otherwise hobbled the agency has had nothing to do with what you say are its wishy-washy accomplishments.

    Seems to me that Ms. Warren was a quick learner on the campaign trail since she knocked off one of this year’s most formidable GOP incumbents who could tap virtually limitless sums of money from Wall Street. But I suppose you have a point. The party could have nominated someone with more campaign experience, like Martha Coakley.

  48. Good post, Simon. Elizabeth Warren is much better off as a senator because she’s in for a six year term. The CFPA could be dissolved before that, and she would have had to fight a lot more politicians to be heard in that arena. As senator, she has a lot more power. She also has name recognition, and will transformTed Kennedy’s seat. Lots of potential here!

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