By Simon Johnson
In Washington today, “bipartisan” is a loaded term. The traditional usage of bipartisan is an agreement across the usual political divide – sometimes a good idea and in many cases the only way to get things done. But a darker meaning applies all too frequently – a group in which the members, irrespective of party affiliation, are very close to special interests and work to advance an agenda that helps a few powerful people while hurting the rest of us.
Financial deregulation in the 1980s and 1990s was pushed by both Democrats and Republicans. It reached its apogee when Alan Greenspan, a Republican, was chairman of the Federal Reserve and Robert Rubin, a Democrat, was Treasury secretary. Bill Clinton was president; Newt Gingrich was speaker of the House.
This is probably why President Obama and Mitt Romney shied away this fall from the issue of who was responsible for the financial crisis that brought us the deep recession and slow recovery of the last five years. Both political parties share culpability for allowing parts of the financial sector to take excessive risk while financing themselves with a great deal of debt and relatively little equity.
In this context, the new Financial Regulatory Reform Initiative of the Bipartisan Policy Center seems eerily familiar.
The introductory white paper published last week reads like a sophisticated manifesto preparing us for another round of deregulation. We have come a long way since the 1990s – and most of it has been downhill. No reasonable person can now espouse the kind of views that Mr. Greenspan repeatedly laid out during his libertarian push to allow banks to become as big and as dangerous as they wished. (In our book, “13 Bankers,” James Kwak and I go through the historical record of deregulation – and Mr. Greenspan emerges as a central character.) Mr. Greenspan’s bipartisan notion – that any financial-sector mess can be cleaned up easily and cheaply – is now completely exploded.
Still, the new initiative, underwritten by the Heising-Simons Foundation, seems likely for three reasons to push strongly for the rollback of important parts of the Dodd-Frank legislation.
First, the white paper frames the entire issue in a way that is incorrect – but highly informative about the attitudes at work: “Evaluating financial regulatory reform requires consideration of the inevitable trade-off between market stability and the combination of innovation, risk-taking and growth” (see Page 6).
There is no such trade-off. Financial crises destroy growth – and for a long period of time. If you want to undermine American productivity, as well as the power and prestige of the United States, step back and allow the financial sector to go crazy again. In the last decade, the United States lost its stability and its growth. It’s too bad the presidential candidates were not pressed on this point during the recent debates, and particularly on the cost of the crisis, estimated by Better Markets to be more than $12.8 trillion.
Second, of the task force’s 14 members, an overwhelming majority are very close to the industry’s way of thinking. Six are lawyers whose practices – according to their biographies on the Financial Regulatory Reform Initiative’s Web site — involve working with major financial-sector players. Two of them, Annette L. Nazareth and H. Rodgin Cohen, are among the most well-known advocates for Big Finance (see this profile of Ms. Nazareth from Bloomberg Businessweek). Another of these lawyers is John C. Dugan, comptroller of the currency from 2005 to 2010, head of an agency famous for being very friendly to the banks under its supervision. Mr. Dugan also features in “13 Bankers” – not as influential as Mr. Greenspan but still a person very much identified with deregulation and nonregulation.
Another two task-force members are senior figures at companies – Oliver Wyman and PricewaterhouseCoopers – for which Wall Street firms are important clients. Robert K. Steel is also on board; he is currently a deputy mayor in New York City and was previously chief executive of Wachovia and worked at Goldman Sachs for more than 30 years. Mark Olson, currently with Treliant Risk Advisors, is a past president of the American Bankers Association.
Powerful people in the industry were, naturally, happy to have regulators back off and supervision to become super-light in the past. In fact, they lobbied long and hard to make this happen – including, for example, the right to use their own risk models in calculating how much equity capital they needed to have. I hear the same arguments today.
With 10 of the 14 initiative members so close to big players in the financial sector, can this initiative in fact be “independent, objective and fact-based”? Their clients do not want to be regulated effectively.
Not everyone in this group should be considered close to big banks or Wall Street more generally. Three distinguished academicians are involved – John C. Coffee Jr., James D. Cox and Thomas H. Jackson. We shall see to what extent they can provide a counterweight to the financial sector. There is also one independent member from outside the academic world, Eric Rodriguez, vice president at the National Council of La Raza, which the Bipartisan Policy Center describes as “the largest national Hispanic civil rights and advocacy organization in the United States.”
If the organizers of the initiative were seeking experienced industry professionals, they should have invited the former insiders who form Occupy the S.E.C. — and who recently submitted another impressive letter on the Volcker Rule in response to a request from Representative Spencer Bachus, Republican of Alabama and chairman of the House Financial Services Committee, for “alternatives” to it.
Third, while the internal governance structure of the initiative is somewhat unclear, there is no reason to be optimistic about the decision-making process and the work product. The directors, Martin Neil Baily and Phillip Swagel, are former senior government officials who now work at think tanks (Mr. Baily is at Brookings and Mr. Swagel at the American Enterprise Institute and the Milken Institute) and a university (Mr. Swagel’s primary appointment is on the faculty of the University of Maryland).
Both are thoughtful people who are open to discussion. Mr. Swagel recently invited me to a forum at the Milken Institute where we debated – along with Harvey Rosenblum of the Federal Reserve Bank of Dallas and Peter Wallison of the American Enterprise Institute – whether big banks should be forced to become smaller (and, in my view and Mr. Rosenblum’s view, less dangerous). Mr. Swagel and Mr. Wallison strenuously opposed the proposition (you can watch this discussion on the C-Span archive).
Two senior advisers, whose role is not made clear on the Web site, seem very similar to most task-force members in terms of their background and current work. Gregory P. Wilson worked in the past with the Financial Services Roundtable (a lobbying group for large banks) and is still an external adviser to the group. James C. Sivon, a top banking lawyer, is a former senior executive at the Association for Bank Holding Companies.
The director of the initiative is Aaron Klein, a former senior Treasury official (under President Obama) who previously worked for Senator Chris Dodd, Democrat of Connecticut. Mr. Klein wrote the white paper, along with Mr. Baily and Mr. Swagel. It is striking – and disappointing – to see such figures endorse the idea of a “stability-growth trade-off” (see Page 7) for modern financial regulation in the United States.
This is the same attempted frame for the issues that I hear regularly from industry lobbyists and their lawyers (for example, at the Commodity Futures Trading Commission hearing on the Volcker Rule in May).
This is entirely the wrong way to look at our financial sector, including the global megabanks that have come to predominate. This particular special interest has become too powerful – and is working hard to repeal the restrictions that can limit its ability to damage the economy again.
Subsidizing, with implicit guarantees, the too-big-to-fail financial institutions is unfair and dangerous. Such subsidies distort and destroy markets. They undermine stability and make it harder to sustain growth. Fewer people will benefit from the growth that we do have.
Let’s be honest: Everyone would like an arrangement in which they personally get the upside and the taxpayer gets the downside. Imagine how much fun it would be to visit Las Vegas on that basis – and the size of the bets you would make.
Asked to comment, Mr. Swagel said, “It is easy and wrong to say that efforts to change Dodd-Frank are to weaken it.” He suggested that this bipartisan initiative could improve financial regulation and that such changes would be good for the economy and for all Americans.
My view is that, unfortunately, the Financial Regulatory Reform Initiative of the Bipartisan Policy Center seems likely to side with industry lobby groups on all substantive questions.
I hope I’m wrong, but their initial paper and the task-force membership suggests that they will just be another cog in the vast Wall Street influence machinery that has come to dominate Washington.
An edited version of this post previously appeared on the NYT.com Economix blog; it is used here with permission. If you would like to reproduce the entire column, please contact the New York Times.
