Financial Reform as Window Dressing


In September, 1901, Vice-President Teddy Roosevelt uttered his memorable adage, “speak softly but carry a big stick.” Shortly thereafter, President McKinley was assassinated by an anarchist, making TR at age 42 America’s 26th president. As president he failed to speak softly at times but did carry an executive bludgeon. His legacy still shines because he swatted at the insolence of his own party as well as Democratic interests. Our current president would do well to consider Teddy Roosevelt’s example in matters of economic justice.

In 1902 the interests of the nation were hazarded by a nationwide coal strike. President Roosevelt attempted to get the miners’ union and corporate management to accept binding arbitration. When the coal industry balked, TR said he would appoint a settlement board without management’s consent and arrange federal assistance to help the governor of Pennsylvania keep the peace. According to presidential historians Milkis and Nelson, TR intended to have federal troops seize the mines and run them in receivership for the federal government, thus disciplining both sides while serving the general public (“The American Presidency,” 2008, 218-219). The country would get its coal while the two greedy sides got a boot in the backside.

President Obama’s dilemma is that nearly every stick he swings is handed to him by a special interest (reminiscent of Bush). The first stick Obama threatened to swing against Wall Street was stamped “Wallsa-wood,” the Street’s intelligentsia knowing it was really balsa wood. Contrast Obama’s recent scolding of Wall Street with the beech tree TR swung against corporate trusts. Then, too, TR had a flat swing for a patrician, as evidenced in the mining case where the miners stood to lose their jobs while corporate management stood to lose its profits and control. In spite of his Republican collar, Roosevelt was prepared for non-partisan action on behalf of an American square deal. His paternalism was not condescending.

Everyone knows President Obama can talk. But will history show he has what it takes to find and conserve the public interest? He knows what sounds good and he knows what constitutes change. But does he know where the changes will lead? Does he understand the ramifications of growing big government while many parts of the private sector shrink? Has he realized that the regulatory reforms he endorses will still leave Wall Street in the driver’s seat of our political economy? This is not to assert that Obama failed to advance meaningful reform in his recent Wall Street speech. It is rather to argue that Wall Street can afford to concede some points for public relations and the stability of its environment as long as it retains control of the architecture of capitalism from which it derives its power. Its all about the architecture, not the window coverings.

It behooves Americans to consider that no recent president has seen through the veil when it comes to matters of political economy. Starting with Reagan, each president has succumbed to delusions, inadvertently facilitating the growing debt catastrophe. The big stick handed to Reagan by his handlers was supply side economics. Reagan swung the stick without understanding the swings, setting precedence for the presidents who would follow.

The supply side model supposedly shifted the burden of demand development in the spirit of a new federalism. The idea of returning power to the states was timely and beneficial to the extent it was prudently executed. But there were problems. Many states did not have the capacity, especially in a revenue constrained environment, to do the work mandated of them by the federal government. Hence, the Reagan plan became a stealth method of taxing Americans at the state and local level (through sales and property taxes). The shift in the tax burden freed national politicians to create false impressions of fiscal efficiencies.

Supply side economics created a bipartisan business interest in cheap immigration labor. The debt-driven expansion of supply increased the business sector’s demand for powerless workers (often illegals) and hand-to-mouth consumers. Uncontrolled Hispanic immigration subsidized profitability for small and big business while giving the Democratic Party the promise of a later surge in party voters. It was a ‘knock-off’ of slavery crafted after the model of indentured servitude — similar to the business model creating so much new wealth for China’s Communist Party elites.

Supply side federal borrowing caused the economy to outgrow a size sustainable without debt. The regularity of the debt infusions produced debt dependency. Now, massive borrowing and central bank monetization is necessary to stave off depression economics. This adverse condition is a road to impaired economic autonomy for the U.S. Arguably, super-bankers have manipulated these outcomes so that questions of finance come to dominate legislative politics, thus giving bankers behind-the-scenes control of nations.

President Reagan’s sincerity was as great as President Obama’s — to give both the benefit of the doubt. But look at the cold facts. Both showed better development as speakers than as economic gurus. Both spoke of bipartisanship while caving in to party politics. Both promoted change while leaving the critical details to others. So, why should we get a superior economic outcome this time? The Reagan administration pushed financial problems into later administrations. But so did the administrations of the elder Bush and Clinton.

The Bushes and the Clintons contributed heavily to the nation’s current economic problems by advancing international agreements that sacrificed quality American jobs and grew American dependence upon the products and finances of other nations. This is no defense of isolationism. But world trade that utilizes the equivalent of indentured servitude in developing countries as a means of taking capital and jobs out of developed countries is not the right way, especially when financial markets don’t work to return a fair share of the profit largesse to the workers on both sides of the ocean. Meanwhile, in America we’ve seen a disconcerting growth of government as a percentage of GDP.

Government does not have to be BIG to prevent private enterprise from going amuck. Private enterprise stays on the right paths through market forces when the financial architecture is sound, the laws are straightforward and firm, and the culture is healthy. Nowadays we create complicated legislation with loopholes and massive bureaucracies that generate mountains of rules. We choke useful business innovation while making large swaths of the economy dependent upon government subsidies or regulatory injustices. Our political mood vacillates between Reagan’s antipathy toward regulation and Obama’s confidence that we need more. While we debate the right balance between market liberty and law we forget that neither will serve us adequately when there are system level faults.

Wall Street lobbyists will tolerate a lot of regulatory jockeying around as long as Wall Street gets to keep its preferred capital architecture. Wall Street wants a debt-driven system that combines continuing low inflation with the prospect of speculative business cycles. It wants a Ponzi-design for the stock market, low capital gains taxes on speculative plays in paper assets, low taxes on mega-estates (as an aid to dynasty building), and freedom for capital to exploit disequilibria in international markets. It wants financial rewards based upon stealth and advantage rather than upon contribution to the public good.

In view of these considerations, the current debate about Wall Street reform is really a partisan controversy about window dressing. Wall Street uses the Republican Party to shield some aspects of its financial architecture and the Democratic Party to shield the rest. Real reform can’t happen because an insufficient percentage of people in government, business, media and academia are prepared to engage in a systematic, cause-and-effect type discussion of how various financial architectures lend themselves naturally in market environments to certain types of outcomes. Any “talk softly and carry a big stick” approach will not make much difference until voters come to appreciate how much financial architecture really does matter!