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A Trap of Their Own Design

At this stage in the electoral cycle, Democrats should be running hard against big banks and their consequences. Some roots of our current economic difficulties lie in the Clinton 1990s, but the real origins can be traced to the financial deregulation at the heart of the Reagan Revolution--and all the underlying problems became much worse in eight years of George W. Bush’s unique brand of excess and neglect.

The mismanagement of mammoth financial institutions over the past decade produced a crisis in September 2008 that required a substantial fiscal stimulus--among other bold government measures--simply to prevent the outbreak of a Second Great Depression. That sensible fiscal response, plus the “automatic stabilizers” that worsen any budget (and help limit job losses) as the economy slows, will end up adding around 40 percentage points to our net national debt as a percent of GDP. If you want to accuse the Obama administration of wantonly increasing the national debt--then let’s talk about the circumstances that required this fiscal policy.

The theme for the November midterms should be: Which part of the 8 million jobs lost [since December 2007] do you not understand? The big banks must be reined in and forced to break themselves up, or we’ll head directly for another such crisis.

Instead, the Democrats have fallen into a legislative and electoral trap that--amazingly--they built for themselves.

Top Democratic political strategists have become obsessed with the idea that they must pass legislation on financial reform, no matter how much that requires compromise (e.g., discarding the consumer protection desperately needed in this arena)--the thinking is that as they control the presidency, House, and Senate (sort of), any other outcome will be judged a failure.

This is a mistake Teddy Roosevelt would not have made. The point is not to pass laws, irrespective of content; the point is to win on substance--by convincing the mainstream middle that you are right. When you’re up against the most powerful people in our society--the kings of finance--there is little chance that a direct legislative assault will work; they give too much to campaigns across the political spectrum and their control over the official mindset is still too strong.

Instead, the administration needs to come at such opponents in a different fashion. Writing in today’s Financial Times, Krishna Guha proposes innovative anti-trust action against big banks with oppressive share of particular markets; this would not require legislation.

Also in Tuesday’s FT, Peter Boone and I suggest combining regulatory action (raising capital requirements steeply) and a size cap on our biggest banks--which could become the centerpiece of legislation that fails in the Senate this spring, after a great struggle, and then becomes a rallying cry for November. Bring the leading Senate Republicans out into the open and force them to articulate their views on “too big to fail”; you will surprised (and perhaps disappointed, depending on where you are coming from) to hear their views--they are happy for our biggest banks to continue to operate substantially as they did during the Bush years. 

Senator Shelby (ranking Republican on the Senate Banking Committee) shows no inclination to rein in our largest banks. He is cooperating with Senator Dodd at this point--presumably just in order to further weaken the likely financial reform legislation. The likelihood this will lead to meaningful reform is rapidly approaching zero.

Think of it this way. If the Democrats lose badly in November--as seems likely, with their current weak and unconvincing narrative about the financial crisis and origins of our mass unemployment--then President Obama’s reelection campaign will be a long struggle to redefine the message, presumably toward finding something he has changed in a major way. In that context, strong attempted action against the power of big banks would appeal to the left, center, and even part of the right. Why wait for defeat in November before making this switch?

Run hard now, against the big banks. If they oppose the administration, this will make their power more blatant--and just strengthen the case for breaking them up. And if the biggest banks stay quiet, so much the better--go for even more sensible reform to constrain reckless risk-taking in the financial sector.

When you are running against opponents with bottomless resources, great hubris, and a profoundly anti-democratic bent, get them to speak early and often in as public a manner as possible. Dig up and publish everything there is to know about them. Review and forward the details of how JP Morgan was humbled over Northern Securities and how John D. Rockefeller was finally brought to account.

FDR’s favorite president was Andrew Jackson. The White House might like to read up on why--Jackson confronted, ran against, and ultimately defeated, the specter of concentrated financial power. President Obama needs to do the same.

Update: Is Obama finally sticking it to the banks? Click here to read Simon Johnson on Obama's new "too big to fail" proposal.

[Cross-posted at The Baseline Scenario.]