It was clear that cash was king in the midterm elections, so I spoke with Roosevelt Institute Senior Fellow Thomas Ferguson, the leading authority on money in politics. Our conversation covered what Nov. 2 said about Democrats, the problems with campaign finance, and where Wall Street's loyalties really lie. This interview originally appeared on New Deal 2.0.
Lynn Parramore: What do you make of the 2010 election?
Thomas Ferguson: The 2010 election was not like others. It was certainly not simply 2006 in reverse, this time with the Republicans winning by a landslide. There is an obvious cumulative process at work here, with first one party and then the other receiving lopsided votes of no confidence from voters. The U.S. economy is barely moving; millions of Americans are looking for work and struggling to find ways to salvage their life savings and pensions; the international position of the U.S. is sliding; and the government is largely paralyzed on issues that voters care about most. We have clearly been in a political crisis for some years; the meaning of the 2010 election is that this crisis is becoming much deeper, moving into an entirely different stage. The parallels to the Great Depression are eerie: At that time, in many countries, voters seem to have followed an "in-out," "out-in" rule. But that process does not go on forever. As the Depression deepened with no solutions, all kinds of strange creatures started creeping out of the shadows. The U.S. seems to be entering that stage.
Lynn Parramore: You're implying the political system failed in some serious way. How so?
Thomas Ferguson: 2008 had all the earmarks of a classic realigning election, as my old colleague Walter Dean Burnham describes them. In the wake of the financial collapse, it looked for all the world like voters were ready for, even demanding, major reforms. They had elected a Democratic president on a promise of "Change," with both houses of Congress solidly Democratic. That's why many people were thinking that Obama was going give us a modern New Deal. They really believed him when he promised change. Instead, Obama's failure on the economy has discredited the whole idea of the activist state. The dimensions of this failure were spectacular: He didn't move aggressively to combat unemployment, the economic stimulus was half as large as it needed to be, and he didn't deal with the mortgage crisis. So unemployment stayed way up, and many people remain in danger of losing their homes or are underwater on their mortgages, with the whole housing sector stalling out. To make matters worse, the administration lavished aid on the financial sector. The spectacle of the government aiding bankers, who turned around and paid themselves record bonuses, has just been unbearable for millions of people.
What the election really shows is not that the parties can't agree -- Democrats and most of the GOP leadership finally agreed on the bank bailouts, for example -- but that the American people will not accept the policies that leaders in both parties prefer. In 2006 and 2008, the population voted no-confidence in the Republicans on the war and the economy. They have just now presented the Democrats with another resounding no-confidence vote. What makes the current situation intractable is the fundamental reason for these serial failures. It's obvious: Big money dominates both major parties. The Obama campaign's dependence on money and personnel from the financial sector was clear to anyone who looked, even before he won the nomination, promoted Geithner, brought Summers back, and reappointed Bernanke. For years I've promised people that I'll tell you who bought your candidate before you vote for him or her, by simply applying my "investment theory of political parties." When I analyzed the early money in Obama's campaign in March, 2008, it was impossible not to see that many of the people responsible for the financial crisis were major Obama supporters. As I wrote for TPM, serious financial reform would not be on President Obama's agenda.
Lynn Parramore: Lots of people point out that the banks have paid back the bailout funds and that the government actually made money on the deal. Can Obama at least claim that this policy was good for the American people?
Thomas Ferguson: The bailout was originally not Obama's but George Bush's, though Obama supported it during the campaign. The "banks-paid-us-back" story is mostly Treasury propaganda. The claim is really based on a narrow accounting of TARP funds. In fact, a lot of that aid has not been paid back. AIG, for example, is still heavily owned by the government. Secondly, the aid was way, way underpriced -- meaning that the federal government got very little for its money. If you want to see what market-driven terms you could get for aiding banks at the height of the crisis, just look at what Warren Buffett received for buying into Goldman Sachs. Most importantly of all, the banks actually got far more help than the direct TARP monies. They received sweeping FDIC guarantees on their debt and truly gigantic amounts of aid from Freddie Mac, Fannie Mae, and the Federal Reserve. All three of these entities have supported the market for mortgage-backed securities that the banks own. They bought huge amounts of them, taking the risks right out of banks, putting it on taxpayers, and in the process handing handsome profits to banks. Regulators allowed the banks to rip off their depositors and credit and debit-card holders, while the Fed handed out virtually free money to banks. To add insult to injury, the regulators have allowed the bankers to use the profits from all these government subsidies to award themselves huge, indeed, record-setting bonuses. Those funds should have been used to strengthen the balance sheets of the banks. And if all this weren't enough, regulators also permitted the banks to hide the true value of their bad loans and they let it be known that the largest ones were Too Big To Fail, which allows them to borrow funds more cheaply than smaller banks. The net result of these big bank-friendly "forbearance" policies is that we have all paid to make these banks fabulously profitable, yet they still remain very weak institutions and are not lending. The resemblance to Japan's "lost decade" is obvious.
Lynn Parramore: Was there ever a chance that Obama could be a new FDR?
Thomas Ferguson: People who were hailing Obama as a new FDR were viewing American politics through the wrong lens. They were treating public policy as the result of the will of voters. But in fact, American political parties are mostly bank accounts. What you are told is the voice of the people is usually the sound of money talking.
Much of my research has been devoted to showing how both parties are dominated by blocs of large investors. The policy choices political parties present to the public on Social Security, macroeconomic policy, campaign-finance reform, and indeed nearly every other policy area save a handful of hot-button "social issues" are basically dominated by big money. The consequences are disastrous: Neither party can level with the American people in crises. They cannot diagnose problems like the financial crisis with any honesty and they can't make any detailed case for why the policies they do sponsor would actually benefit ordinary Americans. What we get instead are pseudo-explanations, myths, and sometimes, obvious mendacity. Political discussions in the media, where they are not distorted by the plain interests of the concerns themselves, are dominated by denizens of the "think tank" and "policy institute" world. Most of these institutions are heavily driven by, surprise, surprise, big money in the form of donors. As Robert Johnson and I documented in our paper for last year's INET Conference, growing inequality in the United States complicates this dismal picture by converting regulatory agencies into recruiting grounds for would be millionaires via the revolving door, while at the same time permitting the financial sector to substitute virtually untraceable stock tips for direct contributions.
Lynn Parramore: Where do you see politicians making up policy myths right now?
Thomas Ferguson: On the Republican side, you again have people claiming that the problems of the Great Recession can be solved by reapplying the policies of Herbert Hoover. Surely this is amazing; they are plumping for going straight back to the deregulated market economy that brought you the 2008 disaster. It's simply crazy, for example, to even consider leaving financial houses free to decide on their own level of leverage, to sell derivatives on exchanges that are not fully transparent, or to sell junk securities to their own customers without telling them. But the Republicans are threatening to roll back even the anemic Dodd-Frank financial "reform" legislation, though, to be fair, they will have plenty of Democratic support for some of this.
And it's obvious that neither party wants to address the problem of campaign-finance reform. Instead, the Democrats spent part of the campaign talking up dangers from "foreign" money. It's not as though the problems of the system of American political financing come from foreign money. The problem is mostly domestic money. And the Supreme Court has made everything worse with its Citizens United decision. But, note well, the tragedy of big money in the Democratic Party was clear long before that Supreme Court ruling or even before Obama started running for president. Just look at the earlier cases I analyzed in my book Golden Rule.
Fundamentally, the problem of money and politics is very simple: Campaigning is costly, much more costly than classical democratic theory has acknowledged. Some way has to be found to pay for it. We may take it as an axiom that those who pay for the campaign will control it. So the choices boil down to just two: either we all pay a little, through public financing of campaigns, or a relative handful of the super-rich end up controlling the system because they pay for the campaign.
Lynn Parramore: Does the financial sector give more to Democrats or Republicans?
Thomas Ferguson: We've all seen the staggering statistics on lobbying and political contributions by the financial sector over the last couple of years. More recently, we've also heard about how finance is supposed to have turned against the Democrats. There's something to this: Bank contributions to the Republicans increased when discussions of a Consumer Financial Protection Bureau started as the House began considering Dodd-Frank. Contributions to the GOP swelled when the White House panicked after Scott Brown won the special election to fill Ted Kennedy's seat in Massachusetts and endorsed the so-called "Volcker Rule," just as public indignation about bank bonuses was at its height. But the size of the shift toward Republicans has been exaggerated. If you look at total political contributions from securities and investment firms over the entire 2009-2010 election cycle, you will see that more money still flowed to the Democrats. Commercial banks, a narrower sub-group of the financial sector, gave more to Republicans, but only by about 60-40.
Lynn Parramore: So where does all this leave the American political system?
Thomas Ferguson: I think the answer is pretty clear: The political system is disintegrating, probably heading toward a real breakdown of some sort. The striking thing is that if you look beneath the surface of the victorious Republican Party, it is about as contentiously divided as the Democrats. The Tea Party's distrust of the party establishment is apparent, but the divisions within the GOP predated the Tea Party's emergence. They were obvious in 2008. At that time, it was pretty clear that a majority of the party did not want McCain. But there was no consensus on an alternative. 2012 is looking like a repeat of 2008: All kinds of people are eyeing the race, including several would-be candidates who can probably raise large war chests. In the end, somebody is going to win -- my dark horse candidate is Haley Barbour, probably the Republican politician who is most closely connected to big business -- but the whole party is unlikely to unite around him or her. In all probability, the GOP primaries will turn into a demolition derby, tending to discredit everyone involved. I also doubt that the Republican governors who are now promising to cut state budgets will find the public nearly as receptive to deep cuts as they think it will be, as people watch essential social services disappear, prisons empty, and see educational institutions trashed out that are in many cases the only hope of lagging states. Nor do I believe there is any popular majority for cutting Social Security, which is clearly emerging as a major issue just as we speak. And parts of the health care legislation are really popular, so that just saying no is going to look pretty foolish after some months.
The key to the future of American politics is the course of unemployment, though that is linked vitally to housing markets and how you deal with people's lost pensions and savings. If unemployment stays high, I would not be surprised to see some intra-party challenges to President Obama, even though right now everyone dismisses that possibility. The unions went down the line with Obama for the last two years and they have little to show for it; some of them are already scouting other possibilities. It is also interesting to speculate about Jerry Brown -- just watch his star rise if he succeeds in overcoming the California fiscal crisis. Were Brown to defeat Obama in a few primaries, then the temptation for Hillary Clinton to come in would be intense. And right now the United States is mired down in two shooting wars that are not going very well.
Even more interesting are the possibilities of a third party candidacy -- the obvious entrant is Mayor Bloomberg. He's plainly considering it. I notice that he does not appear to have folded the network of organizations that quietly talked up his candidacy in 2008. That tells you plenty.
Lynn Parramore: So is American politics fated to be all doom and gloom?
Thomas Ferguson: If you want a happy ending, you probably shouldn't follow our system too closely in the next few years. Instead, go see a Disney movie, unless perhaps Tim Burton is making it. Bloomberg, Brown, or Hillary Clinton, though, are all known quantities. But the experience of the Great Depression was that as things failed to improve the swamp creatures got their chance. And when the economic situation shook out, the geopolitics became more sinister. It would be a rash person indeed who counted on a happy ending to this mess.