Trouble Ahead: Can the Right Seize the Banking Reform Issue in 2010?
Tuesday, 11/3/2009 - 9:25 am by Eliot Spitzer | 21 Comments
Eliot Spitzer explains how the White House defense of the status quo will give Republicans powerful ammunition in the 2010 elections.
Few things are as potent in politics as calling for change at a moment of fundamental dissatisfaction with the status quo. Nobody should know this better than the current White House. Gauzy words describing the possibilities for change are always more comforting than defending the current dire straits. That is why — in addition to all the substantive arguments — the current White House plan for banking reform is so troubling.
Let us fast forward a couple of months. Momentary GDP pops notwithstanding, the economy next year is likely to be in pretty sad shape. Consumer spending is sagging; foreclosures are still climbing (and may surge as ARMs re-set); unemployment is likely to be hovering in the 9.5-10.0 range; federal deficits and state deficits will be soaring; and Goldman profits will still be setting new records.
Added to this toxic political brew will be a new, and perhaps counter-intuitive, but highly successful political attack from the RIGHT: break up the banks. Imagine this: by next spring, an intellectual consensus will have emerged that the concentration in the banking sector that developed from the 1980s until the crash of ‘08 was misguided. Voices as disparate as Former Fed Chair Paul Volcker, Bank of England Governor Mervyn King, meta- investor George Soros, and the Wall Street Journal editorial page will be in agreement on this point.
A few brave souls on the Right — recognizing that the Republican Party has been bereft of ideas in its attacks on President Obama — will then try to re-define a populist, conservative attack by asserting that the White House has been captured by Wall Street. Real populism and change, they will argue, will come from the Republican, not the Democratic, party.
The power of such an attack from the Right should not be underestimated. There will be a huge first mover advantage that goes to the candidates who grab the real banner of attacking the structure of Wall Street as having been the root of the crash of ‘08. We Democrats are spending way too much time wringing our hands over the new, “reformed” structure of regulation, and not nearly enough focusing on restructuring the banks. Congress continues to mediate the intramural battle among regulators who are defending turf in the next regulatory flow chart. Yet the real debate should be how to take the big banks and make them smaller: how to peel off proprietary trading and other high-risk endeavors that are now being funded and guaranteed by taxpayers.
In addition, there is too much attention being paid to the one recent idea thrown into the mix by the White House: how to place a tax on big financial institutions after the next crash, so that they shoulder the cost of the next bail out. The notion that a levy on surviving big banks when the next crisis hits can pay for the bail out seems wrong in at least three ways:
- First, applying a levy at the moment of crisis will merely accentuate a down turn. At a time when we will presumably need more liquidity and lending to revive a stalling economy, the federal government is going to apply a significant tax to healthy institutions capable of lending? Not likely.
- Second, having the healthy institutions cover the losses of the sicker institutions takes us right back into the land of moral hazard. Profligate, risk taking entities will be bailed out by those that exercised caution.
- Third, any downdraft significant enough to bring “too big to fail” institutions to the brink of the precipice is likely to be broad based enough so that virtually all the other major institutions are troubled, probably leaving them in a no position to cover the cost of the bailout.
So the simple question remains: why aren’t we focusing on the problem that got us here in the first instance — the scope, range, and size of the mega-institutions whose risk taking has so far inflicted only enormous harm on our economy? If the Republicans pick up this issue before we do, the elections of 2010 could be even worse than we are now fearing.
Eliot Spitzer is the former governor of the state of New York
I may be biased for having been paid to listen to these people for the past year, and while they have loudly decried TARP and the Fed bailouts of Wall Street, the right-wing media stars — who the conservatives are following much more than the GOP — unabashedly support the free market fundamentalism that led to this crisis. They also see absolutely no problem with the obscene compensation packagers Wall Street executives get, and decry any attempt to regulate them as either socialism or fascism, whichever moronic charge they feel like lobbing at that moment.
I doubt that the Republican Party will use this issue, since their last president shoved TARP down everyone’s throat.
Posted by Zach P | November 3rd, 2009 at 2:00 pm
I think Spitzer is bringing up the right question: why aren’t we focusing on the problem that got us here in the first instance — the scope, range, and size of the mega-institutions whose risk taking has so far inflicted only enormous harm on our economy? And it would be ironic, but smart if the Republicans took this issue as theirs. Perfect because it make it appear that they care about people more than giant banks, but also because if they make the new rules, they can ensure those rules aren’t too limiting to those same banks.
Posted by Shelly L | November 3rd, 2009 at 2:56 pm
The whole crash has been mishandled from the beginning. The big banks were bailed out with no conditions or accountability for the vast sums of money they have been given. We have zombie banks which is hidden by changing accounting rules to make them appear solvent and continued subsidies with basically interest free loans. Allowing banks to use insured deposits puts the county at risk. Any institution large enough to place the economy of the country at risk is too big. Politically it looks like the administration has been captured by the big banks. The proposed reforms don’t make a lot of sense if you want to prevent a repeat of the problem and the regulations such as they are, are being watered down. Anyone with a serious populist message will blow the Democrats away. I don.t know why the Obama administration is reluctant to use populist rage to implement their agenda rather than letting some demagaoug who can do serious damage capture the issue.
Posted by Jim H | November 3rd, 2009 at 3:35 pm
If Obama and crew can’t or won’t reform Wall St and the banksters and break up the “too big to failers” then maybe the right wing can do it? Somebody surely needs to.
Unlike republicans who are against everything Obama, I am all for someone to get us out of this mess whatever party they might be of.
God, even Ross Perot saw this coming in 1992.
Posted by Tired S Quo | November 3rd, 2009 at 4:06 pm
I wouldn’t be surprised to see Republicans use this as a campaign issue, and then just simply not deliver - much like Democrats did in ‘08. Both parties are completely in the pockets of Big Finance, but the citizenry of this country is too accustomed to television to pay attention to the actual legislative work done by the Republicans or the Democrats, thus allowing passing populist “rage” to always be a handy campaign tool, and nothing more. Certainly any number of GOP candidates in ‘10 can use anger against Wall St to win elections. Then, the Dems can use that same anger in ‘12, perhaps.
Posted by James Call | November 3rd, 2009 at 4:20 pm
Get this man off Huffintonton Post.
If I ever see him posting on here again I am leaving NEVER to return.
This man is an iunsult to Huffington Post’s readers. I would cancel my newspaper subscription if he was published in it. Therefore I will take Huffington Post off my Fav’s list.
Posted by ANYwho | November 3rd, 2009 at 4:55 pm
I have learned that during this financial crisis Canada has not paid one dollar to bailout any of their banks nor have any of their banks failed. Maybe we should look north and see if anything they do might work here.
Posted by cvwilson | November 3rd, 2009 at 5:51 pm
The new treasury plan will ensure that ALL the top players will agree (collude) the same risky strategies since they will share the “punishment”. In this way the next failure would be across the board to greater and lesser degrees and the call for help will refer once again to taxpayers.
Posted by RickC | November 3rd, 2009 at 6:08 pm
Spitzer still has plenty to offer!!!
I for one,am happy to see his articles on HUFF POST …. If the “small minds” leave the Huffington Post …SO BE! GOOD RIDDENCE!
Posted by Rose Murphy | November 3rd, 2009 at 7:27 pm
The Dems are ceding the most important argument on the table to the Repubs - unless something changes we will blow our chance to make long-lasting reform. Thank you to Eliot Spitzer for drawing attention to this issue.
Posted by Nellie Frances | November 3rd, 2009 at 10:12 pm
Public’s anger were justified after Michael Milken, Charles Keatin , went to jail for S&L crisis, Ken Lay and all his lieutenents at Enron, Bernie Ebbers and his top brass at Worldcom for Tech Bubble, even Martha Steward became sacrificial Lamb. But public only saw big bonus as usual rewarded to the same wall street banks who wrecked the world economy. Obama doesn’t feel the pain and understand the outrage of people. A drastic crisis requires a drastic action. Public wants to see blood!
Posted by Anita | November 3rd, 2009 at 11:42 pm
There is no difference between democrats or republicans; neither wants to tip over the financial gravy train by bringing about cleanup or reform.
Their fight is to determine who will be the alpha dogs controlling the division of the loot.
Until we have a regulator that wants to catch bad guys, and a President and Legislature who will allow our legal system to function, our country will remain in great peril.
Eliot Spitzer and a squad of untouchables could do wonders.
The financial system that brought the world to the brink of collapse has demonstrated the necessity for having a regulator that wrong doers would fear more than the devil and the burning fires of hell.
We need to have a system to quickly discover what really occurred causing the destruction of our economy.
In a perfect world, a method for fact finding and cleanup would have been the first congressional act, before the first bailout.
Using a carrot and stick, by offering amnesty for cooperation or pursuing prosecutions for lawbreakers who try to hide, would save tons of money and years of time investigating, which did what, and how they did it, while creating the financial crisis.
For everyone who confesses everything, embarrassment would be the limit of punishment, let them keep their ill gotten gains if we could quickly get our country back.
For those who don’t confess, all discovered misdeeds should be prosecuted and offenders should be subjected to the punishments provided for under the law.
Nelson Mandela in an August 17, 1992 speech said “Furthermore, integral to an amnesty is full revelation of past crimes and who committed them. This is not for the purpose of revenge, but to ensure that we do not carry such festering sores with us into the future.
The question before us is; is democracy and capitalism worth preserving.
Our country has all of the natural ingredients that when properly used could rapidly produce, the best health care in the world for all of our citizens, a fair and honest regulatory and financial system could restore the best arena for nurturing new ideas and businesses, we have the resources to assure total energy independence, and when working properly our economy can produce the abundances that are necessary so we can be generous to help those among us who need help to live better, and we can produce the tax revenues required to pay for the services we have come to expect.
At Governor Spitzers inauguration he said. “And if we believe that the market depends upon integrity and fair dealing, then government must step in to make sure that the rules are honored.”
Posted by Bill Watson | November 4th, 2009 at 12:52 am
Governor Mililiken (R) in Michigan, better known as the green republican, seized on the environmental issue way back when and is still revered for it. But I can see the repubs promising reform and not delivering. Then we would be back at square ne, day one of the W. term. 8 very LONG years
Posted by christy | November 4th, 2009 at 7:40 am
HOwever, it may push the current administration to do more and fire incompetent Geithner!
Posted by christy | November 4th, 2009 at 7:44 am
Amen to that. And get someone who is not an insider to actually break up the big boys and set up real regulation with sane incentives. If we don.t prosecute some of these guys we will get a repeat performance.
Posted by Jim H | November 4th, 2009 at 9:59 am
“… why aren’t we focusing on the problem that got us here in the first instance…”
Because Obama’s advisers have convinced him that the “crash” was caused by a perfect storm and not fundamental flaws in the banking, Wall Street, and insurance systems. Thus, their solution to the problem is to tweak the existing system.
Obama should immediately change his financial team with people who understand that the system is broken. And the reason that it is broken is because of deregulation which created predatory capitalism.
Breaking up the big banks is only one part of the regulatory reform that must occur. All derivatives, CDS’s, etc., need to be regulated. Leverage must be reduced, no more black markets, advance computer trading, naked shorts, etc. Wall Street needs to return to its purpose, to efficiently distribute capital for Main Street. Currently, Wall Street has decoupled from Main Street and actually is destroying Main Street.
All companies must be forced to keep one set of books, no more SIV’s, SPE’s, hidden derivatives or other off the books transactions. Such behavior should be criminalized as fraud.
Politicians must end their cozy relationship with the corporations they are supposed to regulate, which could be accomplished with ethic rules that prohibit such behavior. Our current political system looks like one large “Pay for Play”.
Posted by ella | November 4th, 2009 at 10:30 am
Probably quite useful in this context: what the financial pundits
were saying a while back ago, at the height of the “boom”,
before the crash. Eliot Spitzer is right when talking about
fundamentals because they got sidetracked time and again,
only to have the actual problem- issues surfacing really
nasty later, like lending standards for the home buyers, one issue
mentioned in that flashack (some of the pundits were incredibly
wrong, btw.):
http://www.youtube.com/watch?v=2I0QN-FYkpw
Posted by JF | November 4th, 2009 at 11:20 am
What happened to my post, I guess the editors must have gone to the link I provided (http://www.youtube.com/watch?v=63siCHvuGFg ) and saw clip after clip of Barney Frank and friends claiming there is nothing to fear from Fannie and Freddie in 2003!!!! All the while Franklin Raines was cooking the books, was forced to resign, was under investigation but some how still became a mortage and housing advisor for the Obama campaign.
ANYwho and Rose, I must have hit a nerve! You must have followed the link I provided and watched the congressional testimony. You just realized that everything you have been told about mean old George Bush and his Wall Street buddies was just a bunch of crap feed to you by a media with a bias, and the source was not FoxNews! You must feel like the biggest suckers. I feel for you and all the millions out that believe everything the see, read or hear.
By the way, why is it that this video has been out there for some time and I havn’t seen or heard about it anywhere esle but conservative talk radio?
Posted by John M | November 4th, 2009 at 11:45 am
P.S. ANYwho and Rose, I like the Huffington Post, I find many of the articles very insightful. I enjoy looking at the issues from many different views and then drawing a conclusion based on that analysis, maybe you to should try it sometime.
Posted by John M | November 4th, 2009 at 12:00 pm
Eliot Spitzer for President!!!!!
Posted by catlady | November 4th, 2009 at 12:52 pm
PEROT,NADER ,NADER,NADER WHO DID YOU VOTE FOR? LONG ,LONG TIME AGO I CAN STILL REMEMBER . THE CIRCUS KEEPS GETTIN MORE AND MORE PATHETIC AND IVE SEEN THE EXCORSIST 167 TIMES AND IT KEEPS GETTING FUNNIER AND FUNNIER EVERY SINGLE TIME!
Posted by marko | November 4th, 2009 at 1:10 pm