Obama’s New-Found Populism: All Hat, No Cattle

By Marshall Auerback

President Obama is taking a sharp, populist tone with Wall Street and scolding the ways of Washington as he once again looks to the Senate to follow the House and pass one of his top legislative priorities: sweeping financial regulatory reform. It might feel satisfying to hear the President criticize “reckless”, “fat cat” bankers, but the financial reform legislation passed by the House last Friday (and lauded by the President) provides little incentive to change their behavior. In reality populism, with nothing of substance behind it, is just cynical posturing designed to mask genuine failure. Like everything else with this President, he is again showing himself to be (to use an expression of his predecessor), all hat, no cattle.

Appealing to the peanut gallery at this stage is an insult to the voters’ intelligence. The current bill is yet another in a series of major disappointments. The most telling comment on the latest reforms came from the stock market: Bank stocks ended the day higher last Friday (when the House bill was passed to great fanfare), with the KBW Banks index slightly outperforming the benchmark Dow Jones industrial average.

At its most basic level, a bank is an entity that has a reserve account at the Fed, which makes loans and takes deposits. That is its primary public purpose, and we should not be allowing activities which undermine this central function, especially seeing as it is the government which guarantees the public’s deposits via the FDIC. (As an aside, even though the government creates all reserves and guarantees deposits, we do not want it to be directing lending activity because, as “Winterspeak” notes, “we do not want the Government to make credit decisions, they are too likely to dole out money to politically connected constituencies, while starving worthwhile, but unconnected borrowers”.

However good the political optics of resorting to name-calling and demonization of Wall Street, the legislation itself does nothing to recognize that the behavior criticized is a direct consequence of incentives built into the current institutional structure. It completely misses the point because it does nothing to ban activities which were at the heart of the crisis and which will likely be perpetuated as a consequence of the new legislation. All the new legislation does is institutionalize tax payer bailouts and, in so doing, continues the process of privatizing profits and socializing losses. There is no attempt to ban activities that were central to this crisis. The problem is that insolvent institutions have a habit of “betting the bank” through control fraud and the new legislation will not prevent this.

Even positive aspects of the bill, such as the establishment of the Consumer Financial Protection Agency, were significantly watered down. New Democrats – the people we used to call “Republicans” – won concessions that give federal regulators more scope to preempt state consumer-protection laws deemed to “significantly interfere with or materially impair a national bank’s ability to do business.” The change was sponsored by Congresswoman Melissa Bean, who is the most bought for and paid member (by bankers) in the House , not an inconsiderable political achievement amongst our current political profiles in courage in Congress. Bean justified the change on the basis of having, “robust national standards and enforcing them uniformly”, which sounds good until one considers the history of federal regulators, none of whom have historically moved when they plainly should have done so. How many federal regulators do you recall actually blocking the most egregious excesses in the mortgage market over the past 15 years? Preventing the states from moving proactively means that we will likely repeat the experience of the 1990s. Historically, the reform impetus has emanated from the states, not the Federal Government, Governor Eliot Spitzer’s administration being a prominent illustration.

More and more voters are beginning to believe this façade of reform is deliberate – a cynical act of kabuki theatre by the President to mask his own reticence to deal with the problem in an honest manner. It was clear to many of us that the President may not have been serious about reform when he picked Tim Geithner and Larry Summers as the leaders of his economic team a year ago, and essentially relegated any genuine progressive to the Cabinet equivalent of Siberia, as Matt Taibbi recently highlighted Yes, Summers and Geithner both have ample experience: but does that mean that they were qualified to take on the positions they were granted in the Administration? I suppose that depends on whether you think a doctor who botched your surgery ought to be given the role for the next one, simply because he has greater familiarity with your body than another surgeon.

Some on the left have attacked Taibbi very hard for the attacks on Obama, and Matt is no conservative. More importantly, he is correct: Taibbi calls the President for what he is, a sweet talking man who cannot fulfill one single promise he made to the public to get elected. So we have this incompetent financial reform bill, which will not place any limits on another systematic collapse. We have a health bill with no means of sensibly restraining cost pressures within the private health insurance industry. We are still fighting two wars, one of which is being escalated. The economy is still struggling and jobs are being lost.

Far easier to resort to cheap populism that actually do something about it. If the President were serious, he would be pointing out that the bankers have been undercutting every effort at reform, and have been paying off Congress to put loopholes into all legislation. If he were genuinely upset, he would be channeling the country’s anger constructively, by calling on the population to take to the streets in mass protests against Wall St with a view to shutting down the biggest banks and breaking their power once and for all. Of course the President would never do anything so “irresponsible”. Far better to throw a few bones to the peasants and hope that the appearance of reform pacifies them.

The economist Hyman Minsky argued that the Great Depression represented a failure of the small-government, laissez-faire economic model, while the New Deal promoted a Big Government/Big Bank highly successful model for capitalism. The current crisis just as convincingly represents a failure of the Big Government/Crony Capitalist model that promotes deregulation, reduced oversight, privatization, and consolidation of market power. Yet the very people, who have shredded the New Deal reforms and replaced them with self-supervision of markets, are the champions of today’s financial “reform”. As appealing as the story of Paul on the road to Damascus might be, there is no certainly no evidence of any Damascene conversion here amongst the policy makers of the Obama Administration. It’s business as usual, along with the championing of monetary and fiscal policy that is biased against maintenance of full employment and adequate growth to generate rising living standards for most Americans.

We must return to a more sensible model, with enhanced supervision of financial institutions and with a financial structure that promotes stability by aligning the banks’ activities with public purpose, rather than abetting speculation and then bailing the financial sector out after the fact. President Roosevelt proved that we could reform the financial system, rescue homeowners, and deal with the unemployed even as we mobilized and then fought World War II. By contrast, this is an Administration that defines reform as muddled compromise within a profoundly broken polity.

5 responses to “Obama’s New-Found Populism: All Hat, No Cattle

  1. " WE DO NOT WANT IT TO BE DIRECTING LENDING ACTIVITY BECAUSE, AS "WINTERSPEAK" NOTES, "WE DO NOT WANT THE GOVERNMENT TO MAKE CREDIT DECISIONS, THEY ARE TOO LIKELY TO DOLE OUT MONEY TO POLITICALLY CONNECTED CONSTITUENCIES, WHILE STARVING WORTHWHILE, BUT UNCONNECTED BORROWERS" As opposed to the vastly superior private banks who will use it to inflate a housing bubble right? Either way money isn't allocated by markets, but by decision makers. People who make a choice. The banks can give money to connected people just as the government can, and you can bet they do. Did you catch it in the news when the bank's VIP list of politicians was leaked about a year ago? These allocators yield enormous power. These decisions aren't made by the invisible hand, but the visible bureaucrats and managers who decide which future for the country will be approved. So the market plays a much smaller role than economists tend to think. I'm not saying the market is unimportant. I'm saying that the way banks work, in their opaque, centralized way hides the fact that competitive market forces aren't at work there (just look at the profit margin over the last 10 years). This reality means that society may be better served by a more democratic process that will get banks to serve the desires of the public.

  2. I have always called the jerk O'Bummer. The NATION wanted Naderite reforms without Nader, an oxymoron. I voted for Nader and not the O'Bummer; I was afraid that he would be like Bill Clinton. But no! The SOB is even right of the Clintons. I thought that we might get a generic liberalish Democrat. Was I wrong! Young kids with no sense of history and the desire to remove the stain of racism kited O'Bummer to the sky; and now, what do we have, an empire-building right-winger talking "just wars." Read my favorite historian: William Appleman Williams and retrace the arc of U.S. history

  3. The financial products safety commission does a lot to ban any number of bad practices and products. It threatens to make a market of vanilla goods that will actually be competitive.It looks to me like Obama has plenty of cattle, a big white hat, and he's not in the back pockets of these guys. I think of that as positive. Optics are important for politicians.The Wall Street-Treasury cabal is still in charge, admitted.What we have here is all wave and no punch.

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  5. The solution is to create state banks such as the one in North Dakota. These public banks serve as credit creators whose profits go to te the people rather than to plutocratic banking families. Credit creation should be a privelige ONLY OF THE GOVERNMENT, that is the people. Why should private corporations be given the privelige to inflate, than deflate and claim assets. These robber financial families have done this for 300 years in Amsterdam, then England, followed by the US and the rest of the Western world. I applaud China for having the good sense to let the banks serve the government, not private parties. I don't care that China has a 'communist government'. We have a fascist, bank owned government at this time so who are we to complain.