|The consensus on President Barack Obama is that he seeks consensus. He’s always been a centrist, we are told by his many biographers, so it is no surprise — they say — that he hews to the center on issues like financial reform. |
His staff reinforces the message that Obama is all about moderation: The president wants reform, but not in a way that would disrupt the recovery or prospects for longer-run sustainable growth.
There is just one fly in this ointment. In the current Senate debate about reforming the financial system, the push for stronger measures has come largely from the center — not from any radical wing.
But this is not the center that Obama claims. Obama’s moderation is quite conservative on finance — i.e., stick with the devil you know.
Centrist senators like Ted Kaufman (D-Del.), Carl Levin (D-Mich.), Jeff Merkley (D-Ore.) and Sheldon Whitehouse (D-R.I.), among others, have pushed hard to strengthen the financial reform legislation — working with little or no support from the White House.
These moderates have championed reform because they see extreme dangers posed by our existing financial system. In stark contrast to the president’s view, their attitude is: “Hey, it’s quite a devil.”
Even the centrist Democratic leadership — Senate Majority Leader Harry Reid of Nevada and Sens. Byron Dorgan of North Dakota and Dick Durbin of Illinois — all supported (or still support) amendments that would have made the legislation far more effective.
Among Obama appointees, it is Gary Gensler at the Commodity Futures Trading Commission — not the core White House-Treasury team, and, of all things, a former Goldman Sachs executive — who has pushed hardest, with some success, for stronger rules on derivatives.
And it is Mary Schapiro who took the risk to pursue Goldman Sachs — against the votes of the GOP appointees at the Securities and Exchange Commission.
With them all, of course, stands the intellect and vision of Paul Volcker — the man who remained apart, with apparent diffidence, from the initial reform effort last summer. But he then launched an effective sub rosa campaign that culminated in the “Volcker rules” that, at least initially, proposed a hard size on our largest banks and would still force megabanks to drop “proprietary trading” activities — the big speculative bets they make that are implicitly backed by the taxpayer.
No one has yet accused Volcker of being a left-wing radical.
It becomes increasingly clear that the divide is not left-right within the Democratic Party, or even across the aisle but, rather, between people who want to rein in the power of our largest banks vs. those broadly comfortable with the status quo.
Treasury Secretary Timothy Geithner, chief White House economic adviser Larry Summers and the White House-Senate core — which includes some Democrats and most Republicans — are all about not being too tough on the Big Six banks.
But what is “too tough” at this point? The big banks have no good arguments. They are reduced to asserting that being able to take risks in their current manner makes the financial system more stable — a point directly contradicted by their actions in the run-up to September 2008.
It was these banks’ own holdings of “toxic assets” that were the focus of rescue attempts organized by former Treasury Secretary Henry Paulson and Geithner. Holdings at this scale were not acquired in the mundane business of bringing buyers and sellers together. Instead, very smart people at the big banks saw this as a good investment, which proved devastatingly wrong.
The idea that our economy needs banks at the scale and with the characteristics of JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs or Morgan Stanley is preposterous.
Try finding someone in the financial markets or otherwise well informed about how global banking really operates (say, the CEO of a big nonfinancial company) who thinks there are economies of scale in banking more than $100 billion in total assets.
The megabanks — with assets between $500 billion and $2.5 trillion, leaving aside their true derivative exposures, which no one knows — are far beyond the size needed by society. They are so big that their size has become very dangerous.
To be fair, the Senate bill most likely will include steps in the right direction.
On consumer protection, Elizabeth Warren paved the way, and the administration — to its credit — largely followed her lead. On derivatives, Gensler has brought us to a better — though far from ideal — set of rules. On compliance, Schapiro is picking the SEC up off the floor.
The White House supports Warren consistently, has been brought around to Gensler’s approach and hopefully will stick by Schapiro.
But the biggest banks have simply proved too powerful to overcome without sustained and intense counterlobbying by the White House.
A moderate reformist president could have taken, and held, the center ground by putting greater limits on any future damage that our biggest banks can cause.
But, for whatever reason, this is not what Obama chose to do. He presumably had his reasons. But they have nothing to do with being a centrist in general.
As a result, the financial system could well remain largely as it was before September 2008. Perhaps the megabanks will be slightly constrained in their activities; most likely not — at least for Goldman, JPMorgan Chase and Morgan Stanley.
Prepare now for new extremes.
Simon Johnson, former chief economist at the International Monetary Fund, is now the Ronald A. Kurtz professor of entrepreneurship at the Massachusetts Institute of Technology. He is the co-author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”
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