The cover of last week’s New York Times Magazine shows a house divided — one half well-kept and the other in ruins. “Boom vs. Doom,” the headline reads. Then: “Can Washington Fix this Economy? Adam Davidson referees a debate between Larry Summers and Glenn Hubbard.”
Take your pick, America — Hubbard, the fiscal conservative who favors cutting entitlements, or Summers, the big-spending liberal who wants to create jobs for all those people his policies put out of work only … geez, is it six years since the bailouts? Time flies.
In 2010, the documentary “Inside Job” skewered both of these Harvard-trained economists. Back in the mortgage meltdown’s formative years, they’d been coconspirators of sorts. One memorable scene in the film featured Hubbard in his office at Columbia University nervously explaining why studies he’d done for various unnamed “clients” to promote unrestricted trading in high-risk “derivatives” (and for which he was paid handsomely) did not represent a conflict of interest. Summers, who refused to be interviewed for the film, was portrayed as the more serious scoundrel — right up there with former Federal Reserve Chairman Alan Greenspan and with Robert Rubin, the Clinton-era treasury secretary who profited stupendously from mortgage-derivatives trading while working for Goldman Sachs.
So far only Greenspan has admitted to poor judgment regarding regulation and banking. Summers and Rubin still dismiss any complaint about their policies as “revisionism.” Salon’s Alex Pareene writes that when asked how the repeal of Glass-Steagall banking restrictions led to the bank bailouts, Summers replied with a syllogism: “If permitting the combination of commercial and investment banks caused the financial crisis,” he said, “why was fixing it so dependent on commercial banks buying investment banks?”
A trader who worked for Rubin at Goldman Sachs describes his ex-boss as blessed with a Teflon personality. “He’s compulsively dishonest in a certain way, and compulsively honest in other ways. Nobody’s perfect. But for $126 million, they ought to show up.”
Yet the strategy of denial has served him well. Americans have notoriously short attention spans, and it was eons ago (circa 1999) that pressure from Summers, Rubin, Hubbard et al. forced would-be derivatives regulator Brooksley Born out of her job as director of the Commodity Futures Trading Commission.
In fact, according to Pareene, “the financial crisis and subsequent recession have only strengthened the position of the people who believe that unchecked self-interest is its own best regulator.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. The effort to write the rules necessary for it to take effect is being thwarted at every turn. Wall Street’s strategy? Think Battle of the Little Bighorn. At last count, the ratio of lobbyists to regulators was about 300 to 1. The industry has spent more than $1 billion just on influence peddlers in an effort to defang Dodd-Frank. Goldman Sachs alone employs 51 lobbyists. Then there are the lawyers, most notably Eugene Scalia (son of the Supreme Court Justice Antonin Scalia), also known as the Bulldog, whose specialty is blocking rules on technicalities.
Exasperated by the quagmire, Sen. Sherrod Brown, a Democrat, and Sen. David Vitter, a Republican, offered an exquisitely simple alternative to Dodd-Frank in April. Their bill would make banks with more than $500 billion in assets keep capital reserves of 15 percent, twice the normal amount. That way they can bail themselves out.
Wall Street bankers blasted the Sherrod-Vitter bill as simple-minded, impossible, a huge threat to our financial sector’s competitiveness abroad, and, as one pundit joked, a probable cause of tooth decay. Seems the banks want taxpayer bailouts grandfathered in. Talk about entitlements.
The Washington Post political blogger Ezra Klein was in Minnesota last week speaking at St. Olaf. He told students that what troubles him even more than congressional paralysis is how the malaise has trickled down to the populace. Klein, too, sees more and more Americans adopting the Teflon mind-set. Toward the end of his talk, he showed the audience a pair of graphs. The first tracked Summers’ and Hubbard’s issues: persistent unemployment and escalating entitlement costs. “We’ll deal with the economy one way or the other,” Klein said. When the next slide came up, showing a steep rise in global temperatures, he added, “but I really don’t see how we’re going to fix this.”
Bonnie Blodgett is a writer in St. Paul.