The White House today is under pressure, with insiders asking: After the strong showing of the Republicans in the midterm elections, should the president move to the right or to the left?
This is entirely the wrong way to think about the problem - the administration needs to get beyond its mental framework of early 2009, which led it sadly astray with regard to the financial sector. The President needs to find people and themes capable of cutting across the political spectrum; specifically he needs to promote strongly the ideas of Elizabeth Warren - what we need in financial services, above all else, is much more transparency.
The premise - and central mistake - of the Obama administration in 2009-10 can be summed up in what the president said to leading bankers on that fateful day, March 27, 2009: "My administration is the only thing between you and the pitchforks".
The organizing notion then, provided by Larry Summers and presumably Tim Geithner, was that the "responsible" administration would protect global megabanks from "dangerous" populists, in return for cooperation and better behavior. This kid gloves strategy turned out to be a very bad bet - not only is it far from best practice with regard to handling failed financial systems (there must be consequences for executives and shareholders, at the very least), but it also allowed banks and their close allies to bounce back to profitability and use that cash (underwritten by the taxpayer) to oppose the administration on financial reform and, according to credible public reports, to funnel large amounts of money into various "populist" anti-administration midterm campaigns.
The administration, to its credit, did see Elizabeth Warren as an important potential ally early on - hence the emphasis on the new consumer protection agency for financial products. But the White House also should have played this card more aggressively by stressing at every turn Professor Warren's central idea, the need to protect families from opaque small print and deceptive practices.
The Chamber of Commerce and other lobbyists help spend bank profits framing the consumer protection debate as being about "regulation," but that is not the issue. We have had plenty of regulation in recent decades and still have lots of regulators. The issue is capture. Big banks in particular disproportionately captured the hearts and minds (and maybe more) of federal regulators.
The best idea for rolling this back is Elizabeth Warren's - require more transparency and full disclosure. In effect, this is applying the best idea from the 1930s reforms (when it was applied to securities and other investments) to mortgages and credit cards. In the 1920s, there were terrible abuses of consumers around the investments that they were sold (see Michael Perrino's new book). In the 2000s, the abuses were concentrated on the liabilities side of the consumers' balance sheet, i.e., on what they borrowed; again these were egregious abuses.
This is the key point that Ms. Warren communicates effectively time and again - and to very broad audiences (including CEOs, in her effective no-drama style). The nonfinancial private sector completely gets and understands this point; if you sold boxed cereal in the same way that financial services have been sold (by some people), you would be kicked out of the boxed cereal business - by your industry colleagues. The financial sector, unfortunately, has lost its moral compass and ability to police itself. The right approach is to require full disclosure of all material information - just as we do for the securities industry. It's not perfect, to be sure, but it has served us well for going on 80 years.
President Obama is worried about his left and needs to think also where the center is heading. He needs an issue that cuts across left and right. The left hates the abuse of power at the center of the financial system, but the right also understands that "too big to fail" is not a market - it's an implicit government subsidy scheme, it's a dangerous, unfair, and nontransparent form of taxpayer abuse, and it should stop.
If the administration goes onto the defensive on these issues in response to the election, the Chamber of Commerce and its fellow travelers will have a field day. Fresh from its successes in the midterms and backed by an increasing wave of clandestine and - by the way, foreign - money, the Chamber will attack again and again.
What the president needs is someone who can take the fight to the Chamber - force them publicly to defend business practices that are unacceptable and abhorrent to responsible entrepreneurs and executives. (If you doubt whether Elizabeth Warren can pull this off, see her recent speech to the Financial Services Roundtable.)
The problem is absolutely not "fat cat bankers" (if you know a term that more effectively unifies potential supporters of the Chamber of Commerce, let me know). It is that a few people (and their prominent organizations) at the center of our financial system got out of control. We can fix this problem - there is no reason to subject ourselves to the risks inherent in these individuals having excessive power and an inclination to take advantage of ordinary people.
The nonfinancial sector gets this. Community bankers get this. Hedge funds get this. Even people who work in bigger banks (but not the biggest or worst behaved) get this. And people who, until recently, worked in the global megabanks also get this.
But we need a champion. Deputy Treasury Secretary Neal Wolin railed against the Chamber of Commerce earlier this year for its lobbying activities against reform, but he is too low profile to get much traction. Secretary Geithner may now understand these issues but he is not the greatest communicator to the broader public. And the rest of the Obama economic team looks, at best, rudderless - what exactly do they stand for or against?
Elizabeth Warren has the vision, the credibility, and the communication skills needed to really bring overdue changes to our financial system - and to lay the groundwork for 2012. If the White House downplays her role or themes, the next two years will be very difficult.
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