By Simon Johnson
“Populism” is a loaded term in modern American politics. On the one hand, it conveys the idea that someone represents (or claims to represent) the broad mass of society against a privileged elite. This is a theme that plays well on the right as well as the left – although they sometimes have different ideas about who is in that troublesome “elite.”
At the same time, populism is often used in a pejorative way – as a putdown, implying “the people” want irresponsible things that would undermine the fabric of society or the smooth functioning of the economy.
In Latin America, for example, there is a long tradition of populists falling into bed with a corrupt political elite, and the results invariably include irresponsible macroeconomic policies and various kinds of financial disaster (see “The Macroeconomics of Populism in Latin America,” edited by Rudiger Dornbush and Sebastian Edwards).
In North America, however, the populist tradition has proved much more constructive. More than 100 years ago, hot-button issues included direct election of senators and a federal income tax. None of these demands seem irresponsible today, and achieving those goals through constitutional amendments in the run-up to 1914 in no way jeopardized American prosperity.
But there is still an undercurrent of resistance in Washington to policy ideas with widespread popular support. For example, when President Obama said to leading bankers in March 2009, “My administration is the only thing between you and the pitchforks,” he was suggesting that people favoring a resolution process for large financial institutions – closing them down in an orderly fashion – were akin to some kind of a peasants’ revolt.
According to Mr. Obama’s framing of the issues, the administration sided with large banks that were in trouble at the beginning of his administration – and bailed them out repeatedly and on generous terms – because this was the responsible thing to do.
This was a mistake, with lasting consequences for the American economy, because it further entrenched the power of these banks and the people who ran them into the ground. It also changed our politics. On financial regulation, anti-elite ideas have broad appeal and represent the responsible course of action – and they should draw support from across the political spectrum. Populism and irresponsibility are not, in fact, synonyms. When any elite gets out of control and makes egregious financial mistakes, which happens in many societies, the choice is either to rein them in or provide them with unlimited state backing. You can imagine which course is preferred by that powerful elite and, not surprisingly, the “capture the state” approach is often what leads to the most trouble – including irresponsible macroeconomic policies, worsening inequality and further rounds of traumatic crisis.
In their new book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty,” Daron Acemoglu and James Robinson suggest that most economic and political collapse is caused by overly powerful elites – which bring on a wide variety of pathologies.
In early 2009, the people who wanted to arrange the orderly liquidation of failed banks in the United States included Sheila Bair, the entirely reasonable and middle-of-the-road head of the Federal Deposit Insurance Corporation. Ms. Bair was also an outspoken advocate of higher capital requirements and meaningful financial reform more broadly.
According to the definitive account published recently by Jesse Eisinger of ProPublica, she was opposed and largely thwarted not just by top political appointees (e.g., at the Treasury) but also by the Federal Reserve.
Ms. Bair is a Republican; at one point she worked for Senator Bob Dole of Kansas. But she draws broad bipartisan support for standing up to the banks and consistently proposing a more responsible course of action than that preferred by the banking elite. I have heard sensible people on both sides of the political aisle suggesting that she would make a very fine Treasury Secretary, and I agree with that assessment.
Elizabeth Warren is another prominent public figure who stands for reasonable constraints on egregious bad behavior by powerful financial interest groups. Ms. Warren was chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program, or TARP, and in that capacity she drew broad bipartisan support for her even-handed assessments.
When she helped set up the Consumer Financial Protection Bureau, Ms. Warren stood primarily for greater transparency in financial transactions, making it easier for people to understand what they are getting themselves into. Many responsible businesses supported exactly that approach.
This week, Ms. Warren and three other former officials from the oversight panel criticized the way in which the government has helped A.I.G. through nontransparent tax breaks – details of which have only now become public.
As Ms. Warren put it, “When the government bailed out A.I.G., it should not have allowed the failed insurance giant to duck taxes for years to come.” She was joined in her condemnation of the administration by Damon Silvers, a Democrat, and J. Mark McWatters and Kenneth Troske, who are Republicans.
Ms. Warren is running for the Senate in Massachusetts and seems likely to be picked as the Democratic nominee. Her opponent, Senator Scott Brown, opposed every dimension of financial reform. I do not recall his support for or even interest in any attempt – by the left or the right (and I’ve worked with both) – to make banking safer. The issues do not even appear in the policy section of his Web site.
To be clear, Mr. Brown eventually voted for the Dodd-Frank financial reform legislation in 2010, but only in return for the watering down of meaningful changes, “including helping strip out a proposed $19 billion bank tax and weakening a proposal to stop commercial banks from holding large interests in hedge funds and private equity funds.” He now draws considerable financial support from Wall Street, where some executives seem willing to do whatever it takes to prevent the election of Elizabeth Warren.
Mr. Brown presents himself as bipartisan – presumably as a way to garner favor with Massachusetts voters. “I’m not a ‘rock thrower’” is his line – which is very close to saying “I do not have a pitchfork.”
But the people throwing rocks at our economy are not reasonable reformers like Ms. Bair and Ms. Warren. Important parts of our financial elite, particularly the people who ran large financial institutions, went out of control in the run-up to 2008. Powerful bankers wreaked havoc with our economy, destroyed millions of jobs and directly caused a huge increase in the national debt. These people and their successors are now poised to get out of control again.
Two stories in the news on Wednesday speak to the continuing dangers surrounding an unreformed financial sector. The very public resignation of Greg Smith from Goldman Sachs illuminated an insider’s view of Wall Street culture and suggested that it has not changed much, if at all, in the past few years.
Even under the most favorable interpretation, the bank stress tests run by the Fed found that some banks are still struggling. I agree with Anat Admati — these stress tests were not tough enough, again raising questions about whether the degree of “regulatory capture” has also changed since the crisis.
The politicians to fear are those like Scott Brown, who refuse to stand up to Wall Street.