You Don’t Get a Vote!

Barack Obama came to office as the conciliator, the bipartisanizer, the anti-Bush. But this is going too far.

The administration’s style has been to float policy proposals in public, listen to the responses (from other politicians, from the private sector, and from the blogs that Obama does not read), and adjust accordingly. When it comes to the financial regulation proposal that Tim Geithner is scheduled to deliver on Thursday, there may be little left after all the adjusting.

We heard last week that the initial plans to consolidate regulatory agencies have been scrapped, with the exception of closing the hapless Office of Thrift Supervision. Now The New York Times has a story that is ostensibly about the feud between John Dugan, the Comptroller of the Currency (and regulator of many large national banks), and Sheila Bair, head of the FDIC, but is also about the compromises that have dictated the administration’s regulatory plan.

The Treasury secretary, Timothy F. Geithner, the main author of the administration’s plan, in recent weeks has refereed among the competing views of Ms. Bair, Mr. Dugan and Ben S. Bernanke, the Federal Reserve chairman. . . .

With the administration and crucial lawmakers rejecting a single agency, the four officials have often disagreed on just how to streamline and strengthen regulation. Some points of contention include views on which agencies should play central roles in overseeing financial companies whose troubles could pose problems for the overall system, and whether to create a new agency to protect consumers from abusive mortgages or credit cards.

Officials say the latest version of the plan, in large part, is a compromise of various viewpoints.

I don’t want to get into the merits of these issues here. But when you are reforming the regulatory structure of an industry where the existing regulators got it horribly, embarrassingly, catastrophically, world-historically wrong, the last thing you want to do is strike a compromise between the positions of the existing regulators. Members of Congress get votes, and they already have enough ties to the banking industry to worry about; letting the regulators, who don’t have votes, shape the deal makes it more likely that the final result will be watered down into nothingness. Which, of course, is exactly what the industry wants:

Most of the banking industry couldn’t be happier with the current system. Bank executives and lobbyists say that the system, while flawed, enables regulators to tailor rules for a variety of financial institutions.

I know that it’s not as simple as saying that regulators don’t have votes, because they certainly have allies that do have votes, and they have allies who give money to the people who have votes. But the underlying problem is that somehow the Obama Administration managed to back itself into a corner where it had no one but the existing regulators to turn to. Geithner, Bernanke, Dugan, and Bair were all manning the ship when it hit an iceberg, and only Bair can claim that she arrived late enough not to share in the blame. (Bernanke, though he became chairman of the Fed only in 2006, was on the board of governors from 2002 and then was head of the Council of Economic Advisors.)

Shouldn’t someone with an independent perspective have been charged with this task? Paul Volcker, whom we heard so much about during the transition? Warren Buffett, whose name Obama liked to use on the campaign trail? Austan Goolsbee? Christina Romer? What happened to the best and the brightest?  

All I can think is that Obama basically doesn’t think that financial regulation is that important. Or he thinks that the existing system is close enough. Or he figured that Congress would have the final word, anyway.

Or maybe Larry Summers will pull a rabbit out of his hat since, according to the Times, he is in charge anyway. While I have criticized his anti-regulatory positions of a decade ago, by his reputation – brilliant, strong-willed, etc. – I would expect more from him than from the bank regulators who helped bring us the crisis.

By James Kwak

36 thoughts on “You Don’t Get a Vote!

  1. Three months ago, I wrote:

    I don’t believe these people are in any meaningful sense reachable. It’s just possible that Obama will persuade them to try something different but more likely that change will only come after disaster on the national scale. Remember that nothing has dented the conservative coalition in the Senate: not losing a war, not the collapse of the economy, not the dismal failure of response to Katrina. They are convinced that their personal power trumps reality, and their social circle supports them in this belief. I do not think the people in charge of Treasury is so very different.–here

    Is it 1932 yet?

  2. I probably don’t agree with ‘The Raven’ on how we got here, but I do agree that no big regulatory step is likely to be taken before the still approaching bigger crash either happens (in my opinion more likely), or fades away.

    The reason has little to do with the economics (except that economics can at this point offer no low risk path around a bigger debacle than we have seen so far). Instead it has everything to do with the politics. If Obama and the Democrats take any step now which can be characterized as over-regulating or implementing ‘socialist’ measures, they fear they will get tagged for decades with direct and immediate responsibility for anything and everything that goes spectacularly wrong next. This is why they won’t nationalize the big banks now, and it’s why we won’t see a new regulatory environment with any teeth (messing with health care on a grand scale gets a pass because Obama campaigned on it, maybe).

    This is also why Republicans are saying basically nothing about what they would do. Both parties are waiting to pounce on the other in the aftermath of what comes next, because if we are looking at a bigger looming crash that’s the politically rational strategy for them. It’s all about who wins the blame game, because after the Democrats won it during the 1930’s they lived off that narrative for decades, and still get to teach their version of it in schools.

    Once we hit a convincing bottom then our politicians may become more interested in the economic upside, but while the economy’s path is still downward all we are likely to see is these ‘look busy’ half measures.

  3. The only right and good beginning is to bring back the Glass-Stegall Act…and require all institutions a very short time frame to make the necessary adjustments…if weekend deals can be made in 2008 with several toobigtofail institutions, then a 60day time frame for implementation should be plenty of time to set this in motion.

    Investment banks and other financial institutions need to be no longer available for public bailouts and there is no way the fed can regulate risk…the risk that related entities can take just needs to be limited the same way that there are limits on how many options or futures any one entity can buy. But, sumohedgefunds (also known as investment banks) can take all kinds of risk and lever up and get all the reward while it works, but get a free pass and not go bankrupt when they screw up, there is no way that anything any person can say or do that will convince me that any reform is anything other than a dog and pony show — just theater to satisfy the masses who have no blessed idea of anything other than hope that the elected officials will protect their interests with blind faith–and just like some infamous tv evangalists, our government is just as deceptive.

  4. I am from Iowa and vigorously opposed Obama’s nomination in the ill-fated caucuses here (unfortunately, Iowans and the media nominated–and, therefore, elected–Obama) because I felt almost from the start that he was a fraud. He has proven me right far too many times–after he ‘secured’ the nomination, just after the general election and during his first two hundred days as president–for me to ever change my mind.
    He is for “change” until it means making a truly hard decision or one that will upset those who supported him financially–and the vast majority of the money that came his way did NOT come from every day Americans.
    Some of Obama’s campaign promises were nonsensical. For example, he ran in the primaries as the most liberal Democrat–by far–yet promised to work closely with Republicans. How would that ever have been possible? Either Obama would have to abandon his liberal credentials or he would have thumb his nose at Republicans. That “stance” never made sense.
    But mostly Obama has been cynical beyond belief. He either never meant want he said about many of the changes he promised to make or has been perfectly willing to abandon principle for political expediancy. You cannot expect strong reforms to come from a very, very weak person and leader.

  5. I will keep making this point at this web site until I feel it has truly registered here and elsewhere. Within the hour after it was first leaked that Obama would be nominating Tim Geithner to be his Secretary of the Treasury, the DJIA went up SEVEN HUNDRED POINTS in the midst of one of the worst bear markets in history. Do you think parties with any money (and just imagine how much money it would take to move the stock market by that much in an hour) liked what they’d just heard? And, of course, one has to wonder why did they like what they heard so much. I can’t imagine…

  6. This is exactly the problem with regulations in the first place. The economy crashes and the only people to turn to are the people who were at the steering wheel when the crash happened. Sure, you can instead turn to Volcker, Buffett, Goolsbee, Romer, etc., but these people are also mere mortals. They are no different than Geithner, Bernanke, Summers, etc. They went to the same schools and learned from the same teachers and the same textbooks. One day, their regulations are going to fail miserably and you’re going to be searching for the next group.

  7. I keep forgetting to mention things. Putting Warren Buffett in charge of financial system reform would be like putting Osama bin Laden in charge of Homeland Security. He is invested up to his eyeballs in companies that are at the heart of the global financial crisis.

  8. There comes a time where you go from compromising to being being compromised. It increasingly looks like the Obama administration has crossed that line…

  9. It should be obvious by now that Obama is following a lesson that I did not learn until my son became a teenager: Pick your fights very carefully.

    Health care is the fight that Obama has chosen and he is punting as much as possible on everything else. I just hope that at the very least he succeeds in this and that we get a decent public option at the end of the day.

    I also hope that punting on finance reform is not the catastrophe that many of us feel it might be.

  10. It may make sense for Obama to hoard his political capital to spend on health reform: the health care system itself is a huge threat to our national economic viability already and it gets worse every year.

    But it doesn’t appear, so far, that he is ready to go to the mattresses over that one either. In particular, if he goes along with a universal individual mandate, delivering us all as a captive market to the insurance companies, but fails to gain real, meaningful control over costs of health care, then he will only have accelerated our high-speed race to bankruptcy. At least so far he has not drawn any lines in the sand on anything that will bring about cost control. Of course it’s still to early to say he’s surrendered to the health care industry, but the early signs don’t look promising here either.

    Who is the “we” that was referred to in “Yes, we can.”

  11. In Obama’s defense, he is in fact moving the Overton window. It is now possible to talk about these things, in a way it wasn’t before his election. He is governing as president, rather than emperor, as the Bushes did. Nonetheless, the Senate conservatives are a huge problem–there’s an incentive problem there, too–and it is there I think progressive activism needs to focus its next effort.

    Anyone for a new party? I think it’s time.

  12. Sorry, he proved himself to be a puppet when he and geithner gave thier blessings to the paulson/bernake plan.

    he is not a victim to this crisis, he is adding to it by allowing the money printing, and passing the money to the black hole that is mismanaged firms that were the makers of this mess…additionally, there is the issue of corruption that goes along with the whole approach instead of letting firms go bankrupt and allowing smaller banks to step in the place of the failed entities–instead we get a stonewall refusal to help Lehman which gives all those who bet on the Lehman demise win, then all the bets are paid thanks to paulson and bernake passing US coffers to AIG to pay the bet–then the complete disregard for what was lobbied for with the inception of TARP and the obvious hand selection of firms to prop up …it just makes our country look really corrupt now that Obama had his day in the sun, and his opportunity to decry the whole mess, but instead he gave it his stamp of approval–that is when it became apparent who he is working for…the fed.

  13. The posters above who espouse the view that Obama is saving his gunpowder for healthcare have hit the nail right on its head.

    Obama is a masterful politician. Spectacular oratory, sense of timing, image management – he really has it all. That being said, I believe that he is looking to maximize his legacy and get his name into the history books for something more than being the first minority President of the United States. Nobody is going to remember the guy who consolidated the regulators and shut down the banks. Regulation of the financial industry is ultimately a cyclical animal that will forever be enslaved to the ebb and flow of the business cycle and financial markets. But the guy who brought in universal health care? For better or for worse, the President who achieves this will truly leave his mark on our nation.

    Being a true politician, especially one with a great amount of foresight, Obama is simply following the strategic course of action that is best aligned with his goals and aspirations. I can’t say that I am particularly disappointed in him, as I figured this would be the case from the start. Cynicism does get tiring at times..

  14. I was hoping he would not become just another centrist Democrat.

    Oh Well. In his health care reform speech to the AMA he said he wasn’t interested in doing anything meaningful to rein in the “tort tax” of litigation.

    When he mentioned the subject, he got his longest round of applause, which abruptly stopped when he said he wasn’t going to do anything meaningful.

    Estimates are this “tort tax” costs each household about $3,300 annually. Apparently about $1,000 of this goes to lobbying the White House and Congress.

    Government fiat is much more scary. After billions of dollars of tort penalties against the tobacco companies, the government has finally wised up and handed it over to the FDA in order to get real reform.

  15. I agree with The Raven. We won’t obtain any meaningful political change unless something massively catastrophic happens. So far we haven’t reached the generalized hardship of the Great Depression. If it’s a Japanese-style lost decade, people will just endure it silently.

    It’s the same with global warming. We won’t do anything meaningful unless we are shocked into action by a really major disaster (something much more spectacular than Katrina). We need to feel our very existence immediately threatened to act.

    I suppose it’s human nature. Who, in his/her student days, hasn’t lazed around until it was 2 weeks before the exam?

  16. The American people are not interested in regulatory reform. This is a really boring subject, really boring things are easily manipulated by lobbyists into scary government regulation talking points on Fox. Without the interest, this is an politically expensive item to push on the agenda. An agenda that is already incredibly ambitious.

    The American people will engage with this problem when indictments get handed down. Then it has good visuals. Lobbyists will have a harder time selling an anti-reform/regulation agenda when their clients are being perp walked. At that point expect that both Congress and the White House will be making a lot more noise about “meaningful reform”.

    Its gonna take time. But in the mean time there is a need to start the process. Establish that reform does not destroy the economy, remove that talking point.

  17. The idea that malpractice suits are a substantial contribution to the expense of health care has been proven false over and over, over decades. More than half the states have enacted some version of tort “reform” and in no case has health care costs gone down. See. It’s just the insurance companies trying to get out of paying their bills, and continuing to speculate in the markets.

    Oh, now that’s a thought. National insurance regulation. We’ve needed it for half a century, and the insurance lobby has kept it from coming to consideration.

  18. I think you’re overstating your case. Buffet has recently made a few investments in what he felt were the least worse big banks, when offered fire sale prices. Most of his investments are elsewhere, so he’s not “up to his eyeballs”.. He called derivatives “financial weapons of mass destruction” several years ago, showing more common sense than most ‘regulators’.

  19. There is only one person seen recently who has been brave enough to challenge everyone on the banking misbehavior and need for new rules: Elizabeth Warren. I would love to see her put at the head of a task force to reform the current regulatory system. Talk about someone tough who craves accountability and transparency, it is she. She’s got more male equipment than anyone to address this crisis, and is well-spoken and enthusiastic in her desire to find ways to make the public whole.

    I love Christine Romer, but she just is not independent enough, although I think that she should be a part of the New Warren Commission for reform, along with Goolsby. It should not include a single current regulator or policy wonk, especially not Tim, Larry, or Paul. I would have it include Simon, Nouriel, Niall, and Tom Hoenig. That team could provide real revolutionary ideas for going forward.

    Help us out here, Simon and James, try to build a strong concensus by getting on the air waves and providing us will the ammunition we need for a real public outcry on this issue. Unfortunately, this blog, though really wonderful, seems to attract the intellectually astute, and not John Q. Public. That is unfortunate, but just a fact of life.

  20. Well said, amen. I have thought from the beginning that if the insurers were regulated strictly, nationally, required to accept all people on a means tested basis, and had all decisions based on strict guidelines established by the medical community, that’s all it would take to reform the system. AND, all of this would have to be regulated by people who were elected by the public, and who could NOT receive campaign contributions. There’s the solution: simple, huh. Ipso facto, it will never happen.

  21. The sooner the FKDP (Formerly Known as Democratic Party) breaks up into its finance wing — that is, the people now running the administration — and the populist wing (no matter what size) the better, so far as I’m concerned. There’s too much at stake right now to keep papering over the differences over misguided loyalty to the ideals of a party that in reality no longer exists. If destroying the Fourth Amendment via FISA [cough] reform didn’t make that clear, then billions to the banksters NOW NOW NOW with TARP should have.

  22. Feh. Obama’s going to be known as the guy who propped up the insurance companies’ failed business model for another decade by implementing a mandate that guarantees them a market. “Universal” sounds great, ’til you look at the details (as always with anything Obama ever proposes).

  23. Why are insurance companies not nationlized? Would not nationalizing insurance companies defacto provide for universal healthcare, because insurance companies are responsible, culpable, and accountable for adding multiple costly layers and time constraints to the healthcaresystem that have absolutely NOTHING to do with healthcare and everything to do with profitmaking. Pretty patriot platitudes pimped in propaganda commercials do not mask the wanton profiteering. Walk past the propaganda and bruting of the partyline, and “ye shall know the truth, and the truth shall set you free” reality. Much like the finance sector, the healthcare sector is controlled and owned by select oligarchs dominating markets, pools, and flows. The people have no participation or voice in these operations, and/or systems, and no influence on the markets, pools, or flows, – where the predatorclass dominate and devour ruthlessly, mercilessly, – malevolently.

    The predatorclass owns the government, the political leadership (left and right), and the economic oligarchs and superpowers. If things go pearshaped, or Shakespearean, then get with god and make thee straight before the lord, for the day of reckoning is dawning. If the gods or goddess’s care about humanity, then some numinous force will descend to earthly realms and usher, or guide humanity out of the darkness. If not, – then buckle your seat belts, and put your trays in the fixed and upright position – we’re about to enter some turbulence!”

    Robbing from the poor and middle class, to feed the superrich, the predatorclass, is repugnant, and conduct unbecoming. We well and truly are our sisters and brothers keepers, – or – what are we really? Mercinaries? Profiteers? Zealots? Fundamentalists? Imperlialists? Fascists? What are we?

  24. “Nobody is going to remember the guy who consolidated the regulators and shut down the banks.”

    General Jackson’s face is on the $20 bill for doing just that. Things sometimes rhyme.

  25. “All I can think is that Obama basically doesn’t think that financial regulation is that important. Or he thinks that the existing system is close enough. Or he figured that Congress would have the final word, anyway.”

    I think you have hit the nail on the head, here. My impression is that Obama does recognize the importance of financial regulation, but realizes that he does not have the answers. So he relies heavily upon his advisors, who have worked within the existing framework and have helped to create it. They are invested in it and are probably suggesting tweaks instead of major reforms. In addition, as a politician he recognizes that Congress has the final say. (He is not going to veto a Democratic Congress in this area.) He may also believe that the previous administration tried to concentrate too much power for the executive branch, and aim to restore some balance between the Presidency and the Congress.

  26. Kirk Tofte: “For example, he ran in the primaries as the most liberal Democrat–by far–yet promised to work closely with Republicans. How would that ever have been possible? Either Obama would have to abandon his liberal credentials or he would have thumb his nose at Republicans. That “stance” never made sense.”

    Actually, that was his experience as editor in chief of the Harvard Law Review. Trouble is, in that case his ideological opponents were also motivated to produce a quality publication. His political opponents are motivated to bring him down.

  27. I see that Simon Johnson has picked up on insurance regulation, over at the hearing. No idea if this was related to my note, but thanks!

  28. “I know that it’s not as simple as saying that regulators don’t have votes, because they certainly have allies that do have votes, and they have allies who give money to the people who have votes. But the underlying problem is that somehow the Obama Administration managed to back itself into a corner where it had no one but the existing regulators to turn to.”

    By “allies” do you mean ‘near’ proxies? I don’t know how much of a corner he backed himself into, given that he has the authority to choose those in key positions and merely elected to go with ‘what works’ perhaps by keeping this little coterie of banking surrogates. For the average tax payer, this is unworkable, but it’s working for specific interest and with great result. In the vernacular of boxing, this is the ‘corner’ he chose. If you expand the focus to include Wall Street proper and consider that he surrounded himself with ‘ex’ (not nearly enough) bankers, a pattern begins to develop.

    “I don’t want to get into the merits of these issues here. But when you are reforming the regulatory structure of an industry where the existing regulators got it horribly, embarrassingly, catastrophically, world-historically wrong, the last thing you want to do is strike a compromise between the positions of the existing regulators.”

    Sure, but again, in keeping with a clearly evident pattern, the country was sold or at least a sale was attempted along the lines of ‘the best people to get us out of this mess are the ones who got us in it’ in blatant deference to those running the banks. Doesn’t matter how wrong, impaired, flawed or avaricious they’ve demonstrated them to be.

    I think there are many things to like and appreciate about President Obama. Often however, the realities of this administration falls far from the romantic notions of the concept or idea of this administration. It’s hard to believe that he’s been in office a smidgen shy of five months. With all the talk of the lobbyist grip on Washington, you’d think this administration would be more astute and discerning, that key personnel that worked for banks are the ones that hired the lobbyist in the first place as lobbyist only represent the interest of their clients. That said go ahead and get rid of the lobbyist (I don’t think that’s really happened either, but assuming you could) but then if you surround yourself with the people who hired them, nothing has been achieved other than allowing those who used to pay for lobbyist to shape policy directly.

    Yes, Washington and Wall Street are very insular in nature and the characterization of a bubble quite apt. Maybe I am beginning to be jaded, but as I watch this banking reform unfold, I have no illusions about this administration tackling healthcare. The thought of being legally required to have health insurance after the health industry is reformed sends shivers up my spine. If by fixing healthcare the net result is the type of fix Wall Street seems to be getting, which is more of ‘the fix is in variety’, I will not cherish being herded to the insurance companies by law.

  29. I enjoyed the post for it’s thoughtful turns, but we face an inevitable catch-22 here. The “public” – whether the populist version or the investor class – simply won’t accept the anointing of a 3rd party to come in out of the shadows and craft regulatory reform.

    I have as much admiration for Summers, Buffett, and Volker as anyone alive, but even they would be looked at by most as “unworthy” of the task. We’re left with the previous helmsmen because, quite simply, there’s nobody else that would be accepted. This is just the nature of things, and politics is the ultimate manifestation of nature.

    There are no easy solutions to our myriad of regulatory issues – today’s markets are too fluid, too complex to pin down with broad policies. We have to vet it all out in the public forum, accept the give and take, occasionally bite our tongues, and accept that for all its faults we’re basically watching a miniature form of a market-based solution; different forces pushing and pulling until only one survives. 100 years from now, after we’ve been through 3 or 4 new crises, we’ll realize that whatever reform is crafted didn’t quite prepare us for the next one, and on, and on.

    In the meantime and after, it will be up to the individual investor to navigate, make their own decisions, and find the best way to cast the only vote that is always tabulated – the $ vote.

    Ryan Barnes

  30. The political “bubble” of the last century has been the American two party system where the winner takes all, thus effectively stifling debate in the public discourse. This also makes viable third parties difficult or practically impossible as any faction that breaks away from the Democrat/Republican duopoly draws votes away from their former party which then allows their opposition to win elections. You don’t need to know game theory to see this. As one potential solution, America may need to consider Proportional Representation as they do in other parts of the Western world. This would allow the rise of single issue parties which would match up well with the rise of single issue voters. Consider that since each issue is back unequivocally by one party they would be better represented than they would in the two party system which seeks to filter and equivocate depending on what the polls say. Addressing things this way may make moot other issues like lobbying, campaign finance reform, and other proposed measure that seek to limit special interest influence since it makes the “buying” of elected officials expensive (more parties than just two) or impossible (the banking lobby would not be able to buy a populist party). Why strike at the branch when you can strike at the root?

    Perhaps the writers of the blog can address this.

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