When, during a public address, I’m asked about the 2009 bank bailouts, I sometimes tell the analogy of the injured dog. Those of us in the first Obama administration were driving along, and saw an injured Doberman on the side of the road. We picked it up and nursed it back to health…and once it was back to full strength, it attacked us.
The analogy is more artful than accurate. The economic system must have credit flows and given the failure of this aspect of the market, it wasn’t a question as to whether or not we should try to heal the injured dog (of course, how we went about it has been controversial, but that’s a different argument; my take is here). And there is one narrative that says the dog only attacked us after we attacked it, i.e., after President Obama started serving up some heated rhetoric to the denizens of the finance sector.
This all came to mind during a CNBC spot yesterday when I was asked to comment on part of Gov. Martin O’Malley’s speech from last weekend wherein he launched his bid for the White House. The former mayor of Baltimore and governor of Maryland tore into Wall St., riffing off of a comment by Goldman Sachs CEO Lloyd Blankfein:
Decrying big banks as having been behind the financial crisis of 2008, O’Malley singled out Goldman Sachs for particular criticism. He said Goldman Sachs CEO Lloyd Blankfein recently told his employees that “he’d be just fine” with either Republican Jeb Bush or Hillary Clinton as president after the November 2016 election.
“Well, I’ve got news for the bullies of Wall Street,” O’Malley said. “The presidency is not a crown to be passed back and forth by you between two royal families.”
There’s a lot in that quote, a mix of anger at the top 1% and financial markets, heavily seasoned with a reminder that one reason for America in the first place was to shed the yoke of royal succession, a point well made earlier by no less than Jeb Bush’s mom (as she put it, surely there are other families beyond “Kennedys, Clintons, Bushes”).
Obviously, the CNBC panel didn’t like the O’Malley launch one bit, but who’d expect otherwise? Bringing such rhetoric to a financial markets setting is like bringing PB&J sandwiches to the monthly lunch of the severely-allergic-to-peanuts society.
More to the point, is this a viable strategy for someone who wants to be president (putting aside the polling data that show Ms. Clinton far ahead of the pack, by which I mean Bernie and Marty)? It costs a lot of money to run for president and a lot of that money has ties to financial markets. While attacks like those the governor meted out reach the base, how does a candidate thread that needle? Again, this may not turn into a serious issue for those who don’t ultimately pitch a national campaign in the general, but it may well be for others, including Sec’y Clinton.
I’ll leave the political strategizing to those who get paid to do that. But just for fun, here’s how I’d play this if I were a candidate.
I’m not interested in demonizing anyone, or more precisely, any sector of the economy (so I probably won’t get very far). Because that’s what “Wall St.” is—it’s another sector, just like there’s a household sector, retail sector, government sector, and so on. It currently is an inflated sector, and it’s claiming more wealth than it should, often in the form of “rents.” Even more damagingly, it is doing so while too often engaging in counterproductive speculation and bubble-generation.
The problem thus is not that there are greedy individuals in that sector—greed abounds in every sector (I mean, maybe you’d find fewer greedy social workers than hedge fund managers, but you know what I mean). The problem is that financial regulatory policy goosed by bad economics—theories of “rational expectations” which conclude that traders accurately price risk and that banks will self-regulate—has devolved in such a way as to amp up the greed beyond that of Gordon Gekko’s wildest dreams.
So the policy target asks: what will it take to get this sector functioning productively again, by which I mean allocating excess savings (of which there are a lot sloshing about the globe right now) to its most productive uses? That means much less buyback activity, less noise (high-frequency) trading, less dominance by the giant banks, less volatility, and less rent-seeking.
Interestingly, while you haven’t heard enough about this, both Sen. Sanders and Gov. O’Malley have policy ideas in this space. Sanders is pushing a financial transaction tax (modeled after this plan by Rep. Ellison, I’m told), and O’Malley wants to bring back some version of Glass-Steagall, the law that separated commercial and investment banking. An FTT would both dampen noise trading and raise significant revenue; I’m less certain how a renewed Glass-Steagall would work—to some extent, we’re trying to accomplish similar goals with a Volcker rule—but it would be likely to diminish the size and interconnectedness of the system (the latter, more than size, is how systemic risk gets amplified).
Again, I’m out of my lane when it comes to campaign strategy, but as an economist with an appreciation for the tradition role of financial markets, such ideas, along with the implementation of Dodd-Frank, particularly the four pillars I stress here, could be sold as ways to get markets to work better, to get the dog to be a nice house pet that doesn’t attack his owners but plays nice with them.
And with that, and speaking of dogs, you’ll agree with what VP Biden used to tell me when I waxed about such things: “you couldn’t get elected dog catcher.” Which I will take as a compliment.