When children run wild on the playground and get hurt, the most sensible response is not to say: “What’s wrong with those children?” It is: “Where were the adults who were supposed to be watching?”
The most sensible response to Wall Street’s various outrages over the years is not to ask: “Whatever can be wrong with bankers who drive the economy into the ground and then reward themselves with fat bonuses?” Or: “Why are traders permitted to sell hundreds of billions of dollars in fraudulent collateralized debt obligations to the public for years and go unpunished for it?” It is instead to wonder who let them run wild for so long. Bankers (most of them, anyway) are not children. But it’s practically a law of nature that they will try to get away with as much as they can if the adults—the regulators and prosecutors—aren’t watching.
That is what happened over the last several decades, and the lack of oversight has led to a pathological condition that has skewed the U.S. economy in favor of the spoiled “1 percent.” The Occupy Wall Street protesters have correctly divined that the Dodd-Frank law intended to rein in Wall Street only papered over this condition. But if the new social movement wants to get its priorities right, it should decamp forthwith to Pennsylvania Avenue. Both ends.
The problem is much deeper than Wall Street lobbying money and its influence on Washington. The problem is a state of mind that continues to dominate the nation’s capital.
One of the misconceptions about the subprime-mortgage debacle was that it was a unique product of the housing bubble. “The collateralized debt obligation may well go down in history as the worst thing anyone on Wall Street has ever thought up,” wrote David Faber of CNBC in one quickie book on the collapse, And the Roof Caved In. But that description ignored a long lineage of Wall Street “innovation” over the previous three decades that had occurred with Washington’s resounding approval—“improvements” that turned risky assets into better-seeming securities while the adults weren’t watching.
Rampant deregulation, which began during the Carter presidency, enabled the trend. Deregulation became gospel during the Reagan revolution, which in turn was justified by the ideology that markets will take care of themselves and government will only get in the way. Among other changes, the 2000 Commodity Futures Modernization Act created what may have been the world’s most laissez-faire market in over-the-counter derivatives; the Glass-Steagall repeal in 1999 erased the remaining firewalls between federally insured banks and the riskiest trading practices; and the Securities and Exchange Commission lowered limits on leverage whenever asked, creating a pyramid of debt. Increasingly complex products and practices regularly blew up—think of the 1994 bankruptcy of Orange County, Calif., and the 1998 collapse of Long Term Capital Management—but the result was only more deregulation. (I detailed much of this history in my 2010 book, Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street.)
The protesters’ (largely correct) perception that the Obama administration went easy on the financial industry hasn’t stopped an intense Wall Street lobbying effort to gut the meager efforts that combat these pathologies. Bankers’ allies in Congress are trying to dismantle the Dodd-Frank reform and the Volcker Rule barring federally insured banks from proprietary trading. Dodd-Frank is also under assault on the campaign trail: At a recent GOP debate, presidential candidate Rick Perry declared that one solution to the nation’s economic doldrums was to “free up Wall Street.” One of the lesser-known, but most troublesome, areas of retreat is the too-big-to-fail problem. Dodd-Frank requires “systemically important financial institutions” to write “living wills” detailing how they will be dismantled if they get into trouble. But those plans have yet to be written, and a number of regulatory experts say that the law won’t suffice to unwind huge global banks.
One of Obama’s failures as president was to misunderstand the depth of public outrage over America’s finance-dominated economy, which has enslaved the strategies of Main Street businesses to Wall Street’s quarterly demands, thereby dispensing with social equity or any concern about the survival of communities. He also failed to see that this issue largely united voters on the left and the right. Liberals deplore Wall Street’s outsize role in the real economy and its lobbying influence, and conservatives are appalled at the way the capitalist system has been undermined and rigged. Both the left-leaning “mob”—the words of House Majority Leader Eric Cantor—that forms the core of Occupy Wall Street and the Main Street malcontents who formed the tea party have expressed anger about the too-big-to-fail issue.
Yet neither side seemed to have the power to take on Wall Street, and they didn’t get much help from Obama or Congress. The federal government made no serious effort to use its leverage—as the dispenser of bailout money and the holder of preferred stock in the banks—to change the Street’s behavior. The Obama administration did little to reorient pay packages so that some of our greatest minds wouldn’t go into useless financial engineering but instead would begin to consider real engineering.
There is one hopeful sign: It does seem as if the Occupy Wall Street protesters are spreading to Washington. That is clearly where they belong.
This article appears in the October 15, 2011, edition of National Journal Magazine.