Beginning two decades ago to the year, the Democratic party radically changed course on financial regulation. Accommodating the perceived demands of the Reagan revolution, it tossed aside the New Deal philosophy that banking and bankers required strict government supervision, substituting instead the free-market notion that the finance sector, along with other parts of the economy, operated best in an acquisitive state of nature. As former Federal Reserve Chairman Paul Volcker remarked not long ago, “I think the regulators and markets and government have been imbued with the idea that markets left alone will discipline themselves.” It hasn’t quite worked out that way.
The original economic choreographer for the Democrats’ 20-year dance with the Devil was Robert E. (Bob) Rubin, Bill Clinton’s chief economic advisor and Treasury secretary through most of the 1990s. It was Rubin, a 26-year veteran of the investment bank Goldman Sachs, who first brought a Wall Street policy perspective and sensibility into the formerly liberal-labor Democratic Party, where it has predominated ever since.
Most critically, Rubin persuaded Clinton not to use executive authority to regulate derivatives when those exotic financial instruments first began sending up red flags in the late 1990s. Equally damaging, he and his deputy Lawrence Summers provided indispensable assistance to congressional Republicans in enacting the Gramm-Leach-Bliley Act of 1999, which eviscerated Glass-Steagall’s wall of separation between traditional commercial banking (loans and deposits) and investment banking based on leveraged securities speculation, allowing for the formation of the too-big-to-fail (tbtf) diversified financial groups.
Rubin himself took advantage of Gramm-Leach-Bliley by revolving out the White House door in 1999 to join Citigroup (formerly Citicorp), the new financial-services giant created by combining with Travelers Insurance, a merger made possible by the deregulation process; there, he became first legal counsel, then director and board chairman, and earned $126 million over a 10-year period pursuing, according to retired FDIC Chairman Sheila Bair, “high-risk lending and investment strategies” that, by 2008, had made it a “sick bank.” In Bair’s words, “Citi was no longer a bread-and-butter commercial bank. It had been hijacked by an investment banking culture that made profits through high-stakes betting on the direction of the markets.”
Before and after leaving Washington, Rubin mentored a generation of acolytes who served both Democratic presidents and financial interests. Most prominent was Lawrence H. Summers, who succeeded Rubin at Treasury (1999-2001) and earned his Wall Street bona fides by helping conservatives in Congress push through the Commodity Futures Modernization Act of 2000, which formally legalized the credit-default swaps and other derivatives that brought down the system eight years later.
Summers, in turn, begat Gene Sperling, the current director of Obama’s National Economic Council, who held the same post under Bill Clinton (1996-2000) prior to serving as a Rubin staffer. At Summers’ direction, Sperling helped negotiate the repeal of Glass-Steagall and then, after a hiatus at Goldman Sachs, worked his way back to Washington, where he became advisor to Treasury Secretary Timothy Geithner on fiscal, budget, and tax issues in 2009-11. Along the way, Sperling authored The Pro-Growth Progressive, a treatise invoking Democrats to harness “market forces,” not government, in pursuit of party objectives.
Sperling is just one in the Rubin/Citigroup line of succession that marks the Obama era. Wunderkind Peter Orszag, the president’s budget director during his first term, left the administration to work for (you guessed it) Citigroup. Jack Lew, just appointed as Treasury secretary to succeed Geithner, ran the Office of Management and Budget for Bill Clinton (1998-2000) and later (2008) earned a $1 million salary dispensing wisdom at (where else?) Citigroup. (He has lately endorsed Big Banking’s opposition to a new, updated Glass-Steagall Law.) And Jason Furman, nominated in June to become chairman of the president’s Council of Economic Advisors over organized labor’s objections, served in the Clinton administration, later worked with Bob Rubin, and eventually directed the Rubin-founded Hamilton Project, a market-oriented centrist think tank.
But the ultimate personification of the Rubin/Citigroup influence on the Democratic party is without doubt recently resigned Treasury Secretary Timothy F. Geithner, who also enjoys the dubious distinction of being Sheila Bair’s bête noire in her accounting of the late financial crisis. No one has been closer to Barack Obama than Geithner when it comes to financial and economic policy, and no one has been more within the orbit of Bob Rubin, whom author Bair calls Geithner’s “mentor and hero.”
Geithner, who from 2003 to 2009 was president of the Federal Reserve Bank of New York, the premier institution of the Fed system, bears major responsibility for how Washington’s flawed response to the financial immolation — limitless bailouts minus basic structural reforms — unfolded during the waning Bush years. Despite that, his apprenticeship at Treasury under Rubin and Summers during the Clinton presidency (along with Rubin’s endorsement), was apparently enough to secure Geithner’s nomination as a bank-friendly Democratic Treasury secretary.
In that capacity, he influenced the shape of the Dodd-Frank reforms for the worse, minimizing penalties and regulations, and seeing to it that the tbtf banks, especially Citigroup (the Robert Rubin Graduate School of Democratic Centrism), emerged fundamentally unscathed. Sheila Bair notes that Geithner and his Republican predecessor Hank Paulson shared a similar outlook: “To them, pretty much anything that was big and in trouble was systemic and if it was systemic, that meant it was entitled to boatloads of government money and guarantees.” Conversely, “when it came to homeowners, it was a very different story.”
In the end, the key question is one Sheila Bair indirectly posed about the president and Tim Geithner: “I did not understand how someone who had campaigned on a ‘change’ agenda could appoint someone who had been so involved in contributing to the financial mess that had gotten Obama elected.” The answer is the “regulatory capture” of a heretofore liberal political party by the banking establishment, which has led over time to an ingrained unwillingness by Democratic presidents to entertain placing contrarians, such as Sheila Bair herself, in positions of financial authority.
Franklin Roosevelt picked just such a person to run the Federal Reserve in the 1930s: Marriner Eccles, an unconventional small-town Republican banker from Utah. Wall Street hated Eccles and the feeling was mutual; FDR appointed him anyway — to the benefit of the country. That’s the direction Democrats need to go to redeem their financial souls.
Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. This is the second of two related columns. He is the author of two prizewinning books.
From The Progressive Populist, August 15, 2013
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