Is it Time for the Next Way?

by Dan Kervick, New Economic Perspectives

Posted 02 August 2013 at New Economic Perspectives

The 2008 financial crisis has been oozing slowly down the DC memory hole for some time now, as a series of destructive and economy-crushing budget battles has taken center stage in Washington. But the debate over outgoing Fed Chief Ben Bernanke’s successor has reignited a lot of the pain and outrage that the 2008 debacle caused. That debate, and the President’s obtuse support for Larry Summers, is also casting a very harsh light on the White House’s basic competence, its seemingly dim grasp of the causes of the financial collapse, and its blasé and corrupt attitudes toward the correct response to it.

Ezra Klein asks what is now increasingly seen as the central question about the decision on Ben Bernanke’s replacement for Fed Chief: “Do you trust Larry Summers or Janet Yellen to police Wall Street?” And Klein accurately reports what I imagine is the consensus opinion among people with a serious concern about financial regulation and reform when it comes to Lawrence Summers:

This is why the prospect of a Summers chairmanship gives financial reformers heartburn. They think he can’t be trusted to regulate Wall Street.

But this murmuring among the zealots doesn’t impress complacent White House insiders, like Michael Barr, who thinks Summers doesn’t get enough credit. Barr said:

“I wouldn’t have gone to work for Larry if he didn’t believe in financial regulation.  He cares about this stuff. I know he’d implement Dodd-Frank. And I think his impatience, which some people don’t like, would serve us well in this implementation phase.”

Barr attempts to turn the now infamous Summers impatience into a plus, perhaps picking up on the new meme of Summers’s “gravitas”, a seemingly imponderable and occult quality of masculine charisma and decisiveness that Summers is reputed to possess in abundance.

Klein continues:

The distinction that Summers’s allies draw is that he favors blunt, simple regulation — such as higher, simpler capital ratios – over more intricate regulatory interventions, which he thinks routinely enable Wall Street lawyers to outmaneuver government regulators. This makes him, they believe, a tougher regulator than many of his critics, who they view as getting distracted by ideas that punish the banks rather than secure the financial system.

Well, OK. But the Fed has already implemented those tougher capital rules under the leadership of Bernanke and Vice Chair Janet Yellen, who came out strongly for them back in January. So what else would Summers do?

Klein then offhandedly says:

The criticism of Yellen is that — like Bernanke and Alan Greenspan before her — regulating banks simply isn’t something she’s terribly interested in.

Now that’s funny. Because in addition to the WSJ piece on capital rules to which I just linked, a cursory web search brings up several major Yellen speeches and writings on Financial Reform:

• A Minsky Meltdown: Lessons for Central Bankers

• Linkages between Monetary and Regulatory Policy: Lessons from the Crisis

• Pursuing Financial Stability at the Federal Reserve

• Macroprudential Supervision and Monetary Policy in the Post-crisis World

Yellen appears to have thought about financial regulation quite a bit indeed, including showing an appreciation for Hyman Minsky’s financial instability hypothesis. And unlike Summers, she has actually been working on this stuff for several years now, because it’s … you know … her job. The fact that Yellen has 20 years of experience at the Fed as both a president and a governor seems unimpressive to Summers’s fans, who are more turned on by the je ne sais quoi of Larry’s charismatically glowing brain power. Whatever Summers has, it seems to produce that strange “smartest guy in the room” syndrome among fawning observers. (Weren’t Ken Lay and the Enron guys also the smartest guys in the room?)

But we are also told that Larry the Gravitating Gravitaster has the trust of “the markets.” Now who are these guys from “the markets” who have bestowed this vaunted trust? Are those the same 13 guys who were in the room when Summers shot down Brooksley Born?

[Warning to reader: Brooksley Born is a gravitas-deprived female whose competent professionalism some Summers fans may find disturbing. View clip with caution.]

Or are they the guys who nodded in vigorous approval when Summers mocked Raghuram Rajan as a Luddite for daring to challenge the Wall Street bonus culture?

The new White House effort to turn Summers into the candidate who is stronger on regulation is an impressively Republican turn of strategy.  Republicans are long known for taking a candidate’s signal weakness and turning it into a virtue through the rhetorical power of sheer chutzpah and denial of the obvious.

The Democratic Party is on the verge of defining itself as congenitally untrustworthy and systemically dangerous when it comes to the financial sector. They seem to have spliced the criminogenic culture of Wall Street deeply into their DNA.  They have made a point of refusing to enforce the law of the land against the financial plutonomy on the grounds that the big bank poobahs are “too big to prosecute”.  And now the same guys who should be in political Siberia for creating the economic conditions that allowed an unleashed, predatory and bloated financial economy to go critical and implode in 2008 are right back in the mix again, angling for one of Bill Clinton’s famous second chances.

(Or maybe it’s a third chance, given that Summers is also responsible for putting the kibosh on a Christina’ s Romer’s recommendation for a bigger stimulus package. Alas, Romer is another little lady bereft of the aforementioned gravitas that, as we all know, is carried by the Y chromosome.)

Now the catastrophe of 2008 was by no means a partisan affair, but rather a bipartisan effort applied over three decades of neoliberal enthusiasm for deregulation and market fundamentalism.  The Democratic contingent among this trend was known sometimes as the Third Way, and was represented by organizations like the Democratic Leadership Council. Summers, Robert Rubin and the Clintons were among its leading lights. The economic world they helped engineer – along with their Republican ally Alan Greenspan – failed and crashed in 2008.

You sometimes hear some funny partisan theories from these old school Democrats about the financial crisis.  Their line is that the economy was just awesome until the Republicans “put two wars on a credit card.” Do they really believe the conservative theory that public debt and spending collapsed the economy – perhaps via “crowding out”?  Do they really not get the role of the deep structural flaws, socioeconomic imbalances, rampant greed, tolerance of exploitation and theft, and predatory financial cancers that define the world they themselves helped build in the 90’s, a tottering and doomed system that was already in place before the wars came along?  No wonder Obama has wasted three years helping the Republicans strangle the economy with grand bargains, fiscal cliffs and sequestrations!  They’ve got an ostrich view of history, and a ridiculous view on the underlying causes of the 2008 crisis.

Right now, it looks like most prominent Democrats in the established punditry and elite opinion and policy class have zero interest in transforming the real economy by introducing major structural reform, and just want to get back to business as usual. Obama famously promised to stand between the bankers and the people with the pitchforks.  Like Warren Harding, who also presided over rampant corruption, Obama and the old guard Democrats just want a “return to normalcy.” They have no economic ideas left beyond more corporate tax incentives, bubbles, financial fluff, and rich meals of vampire squid sashimi for their lower Manhattan cronies.

It’s hard for me to believe that Democratic office seekers are eager to go into 2014 with this kind of stiff-necked backwardness and stubborn anti-populism defining their party. They need to tell the White House to get a clue. The neoliberal era needs to be over … yesterday.  It failed.  It crashed and burned.  Somehow Democrats need to find a way to cut the cord with the Third Way for good, empower a new and less corrupt generation of leaders, and begin to develop the Next Way, an agenda for substantive equality, vibrant participatory democracy, financial sanity and reform, vigorous enforcement of the rule of law and full employment.