It's open season on Obama's financial reforms and the shots are coming from all directions.
• NYT columnist Joe Nocera believes that Obama won't achieve Roosevelt's greatness unless he is willing "to make some bankers mad."
• Kevin Baker, writing in Harper's, also sees the conflict-averse Obama more like Hoover than like Roosevelt, as he moves "prudently, carefully and reasonably toward disaster."
• The banking lobbyists are busy undermining Obama's financial consumer protection agency by proudly defending our inalienable right to be duped by the mortgage broker of our choice.
• Meanwhile, Democratic and Republic party conservatives and moderates fret about European socialism as well as the impact of increased regulations on "financial innovation" -- the very kind that just sent us over the cliff.
The only thing everyone seems to agree upon is that Larry Summers should become the next ambassador to Somalia.
If there is anything like a consensus among thoughtful folks it goes like this:
Financial Consumer Protection Agency: Good -- assuming it doesn't get watered down by the flood of bank lobbyists filling the halls Congress at this very moment.
Controlling Derivatives: Bad -- because the reforms don't provide tight control on the custom designed financial products that caused all the havoc in the economy.
Regulating Too Big to Fail: Ugly -- for leaving the large financial institutions in place rather than busting them down to size so they no longer are too big too fail.
Wall Street Salaries and Bonuses: Priceless -- for bankers because there's nothing in the reform package that will stop bankers from paying themselves a fortune as soon as they can book some fictitious profits.
The battle is quickly devolving into endless discussions about whether or not the Treasury or the Fed should be in charge of this or that function; whether the S.E.C. (which couldn't spot the $65 billion Madoff scam) is up to the task; whether there are too many or too few regulators; and so on. It will all sound like it really matters: It doesn't. As I've tried to argue as forcefully as possible in The Looting of America there are only two important yardsticks for measuring real financial reforms:
1. Are we doing something about the obscenely narrow distribution of wealth that led directly to the crisis -- a concentration of wealth that is and will continue to wreck country?
2. Are we reducing the size of the bloated financial sector and moving capital to the real economy?
By these two criteria, Obama, Congress and even most of their progressive critics are in trouble. They seem to be afraid that Joe the Plumber will call them Marxists if they advocate reigning in our 400 billionaires (who collectively have accumulated $1.56 trillion). But plumbers are in very short supply among the top 300,000 elites who have as much income per year as the bottom 150 million Americans (a ratio of 1:500). Most of the public understands that there's absolutely no justification for building an economy that caters to these "economic royalists" (as Roosevelt put it) at the expense of the rest of us, especially when this concentration of wealth is a recipe for financial chaos.
We've just lived through a case study of what happens when income gets stuck in the hands of the few: it fuels a fantasy finance casino on Wall Street. It wasn't just Roosevelt's great financial reforms that did the trick. The Depression and then WWII greatly compressed the income gap. There just wasn't as much money floating around at the top to fund the casino. That compressed income distribution remained intact until Reagan unleashed the rich with tax cuts, widespread deregulations, and labor-bashing. That initiated the fantasy finance party that gave us the savings and loan fiasco, merger mania, the dot-com bubble and bust, the housing-and-derivative bubble, and then the great fantasy finance crash of 2008.
Also, there's nothing in the proposed reforms or in most of the critiques that really would move money out of the financial sector. Financial firms recently accounted for nearly 30 percent of all profits and a quarter of the GDP. The financial sector has nearly as many employees as manufacturing. Even now it has a low unemployment rate (4.9 percent), especially when compared to the rest of the economy (9.4 percent). We cannot thrive or even survive in an economy that only moves money around instead of producing tangible goods and services. The entire financial sector is a structural bubble still waiting to be punctured.
It would have helped greatly if Obama and his liberal critics had signaled their support for Rep Peter Defazio's bill to place a small excise tax on each and every financial transaction. It also would have helped if we had an across-the-board wage cap on all financial employees -- a President's Wage Cap where no one in the financial sector would earn more than the President of the US. After all, in a myriad of ways the entire sector is now on the federal dole.
From Krugman to Obama, everyone agrees that we need to take the swashbuckling adventure out of finance and once again make it so dull that it just provides financial support for a vibrant real economy, instead of high stakes gambling. The best way to do that is to cap those compensation packages, which is sure to send the best and the brightest scurrying into other, more lucrative fields.
Finally, if we want to learn form Roosevelt and the New Deal, we need to get past our obsession with personalities. Sure individuals matter and FDR was truly special, as is Obama. But ideas and movements matter more. Roosevelt was always looking over his left shoulder at forces and ideas that sought to reign in or even replace capitalism. He would be the first to tell us that if there's no progressive mobilized opposition and no coherent alternative to share with the public, it really doesn't matter if we replace Geithner with Krugman.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.