As with Germs, So with Republicans: Sunlight Will Be the Best Disinfectant
By Robert Hockett
One of the more interesting features of Republican opposition to a variety of salutary proposals made by the Obama Administration and the Democratic Caucus in the Congress, I find, is that so many features of these proposals to which Republicans currently -- and flamboyantly -- object originate with ... well, Republicans themselves.
A particularly interesting case in point here is that of the "individual mandate" feature of the health insurance reform measures passed in the House and Senate shortly before the winter break. That is a feature about which Neil, I, and especially Mike here at DoL have written at length both here and elsewhere from a number of angles -- fiscal, financial, and constitutional alike. What is interesting about the mandate from the angle of vision I am adopting in this post is the fact that it was originally proposed as an alternative by Republicans -- Republicans then opposing early versions of the Clinton health care reform initiative in the early 1990s, some of whom remain in the Congress to this day and now oppose the mandate. Even more interesting, perhaps, is that the individual mandate has been supported as recently as this past autumn and several years ago, respectively, by such current Republican notables as Charles Grassley and Mitt Romney. See, e.g., http://www.politicsdaily.com/2009/08/24/individual-mandate-flies-under-the-radar/5, and http://www.opinionjournal.com/editorial/feature.html?id=110008213 . (Ironically, President Obama, for his part, opposed the individual mandate idea during the 2008 campaign, and appears to have embraced the idea in order to win more support for health insurance reform from Republican quarters and the insurance industry, as an offset for the additional costs that would be incurred by prohibiting preexisting condition exclusions.)
Notwithstanding the Republican origins of, and recent prominant Republican support for, the individual mandate, however, it has become the latest putative basis upon which Republicans now predicate their charges of Bolshevism on the part of proponents of "Obamacare." This curious change of tune -- as if "on a dime" -- naturally prompts an intriguing hypothesis: Could it be that Republican opposition to Democratic proposals right now are not actually about the perceived substantive merits of the proposals at all, but are in fact about inflicting failure upon the Obama administration and the current Democratic Congress? Certainly Republican Senator Jim DeMint's infamous "Waterloo" prognostication of this past summer -- http://www.youtube.com/watch?v=mHV4nDS501Y -- afforded reason enough to suspect something along these lines even before the latest Republican volte face on the individual mandate. But another, more recent case strikes me as affording the best case yet for concluding that the Republican Party has decided to throw policy merits entirely to the winds and concern themselves solely with getting the Cossacks into Paris, if I may take up Senator DeMint's Napoleonic simile.
The case to which I refer has to do with a particularly salient public policy concern -- namely, the reform of our regime of financial regulation. Many DoL readers will recall that, at the end of last month, President Obama announced his support for three new finance-regulatory measures recommended by Republican Paul Volcker, the former Federal Reserve Chairman now widely viewed, in the wake of Chairman Greenspan's diminished standing, as the last successful occupant of that hallowed office. It will be helpful first briefly to recapitulate those three proposals and preempt possible confusions about them. Then I will report on the most recent Republican reactions to them and to the other most widely reported proposal for finance regulatory reform -- the establishment of a new Consumer Financial Protection Agency.
With respect to the first proposal, which would place limitations upon commercial banks' proprietary trading activities, there is a widespread misperception that the 1999 repeal of Glass-Steagall's imposed "wall of separation" between commerical and investment banks was meant to permit commercial banks with federally insured deposits of ordinary folks' money to speculate in the financial markets with that money in the manner that investment banks do. But this is not so. What changed in 1999 was simply that federally insured commercial banks could now affiliate with -- i.e., could be owned by the same parent company as -- investment banks, on the understanding that the commercial banks themselves would continue to operate and be regulated as before. But this distinction itself has been steadily eviscerated by bank and bank holding company practices in recent years, and so President Obama and Former Fed Chairman Volker are best seen as taking the 1999 legislation at its word rather than as aiming to repeal it. That legislation -- Gramm Leach Bliley -- liberalized financial regulation, but did not end it. The Volcker-Obama plan is accordingly best viewed as, if anything, insufficiently ambitious -- too "conservative" -- in character, rather than as aimed at going back to the "over-regulatory 1990s." (I know. I share your temptation to guffaw.)
With respect to the second proposal, which was that the law take account of more forms of liability than deposits alone in determining bank market share, this too should have been viewed as a welcome response on the part of the regulatory regime to changes in the banking market. When we liberalized interstate banking and branching in the mid-1990s, we recognized the danger of excessive market concentration that this posed -- a danger that threatened consumers with oligopoly and the financial system with moral hazard rooted in bank growth to sizes thought too big to allow to fail. We responded to that danger at the time by prohibiting any bank from acquiring more than a 10% market share in deposits -- which was huge already. What has changed since then is that banks take on more forms of liability -- that is, they borrow from more sources -- than those owed to depositors alone. And the 10% market share limits applied to deposits have not been extended to these deposit-substitutes. The consequence is growth up to "too big to fail" size behind the scenes, so to speak. Finance-regulatory innovation must keep up with financial innovation, and this is precisely what the President's proposal would do. Please keep this one especially in mind when I turn to the current Republican reaction.
Finally, with respect to the third proposal of last month, that financial institutions be required to disclose all of their contingent liability exposures -- i.e., all of their financial derivative transactions -- just as they already are required to disclose all of their non-contingent liabilities, this too has been long, long overdue. Consumers and other participants in the financial economy, not to mention risk regulators, cannot rationally assess the value of prospective transactions with financial institutions -- including the reliability of investments in or through such institutions -- or the degrees or loci of systemic risk in the financial system if they know what such institutions already owe and are owed, but not what they might come to owe or be owed by virtue of contracual commitments. And the same reasons that prompt us to require disclosure of the first kind of information argue for requiring disclosure of the second kind. While there might -- might -- have been some reason to let the derivatives markets develop undisturbed in the late 1990s as they were just beginning to burgeon, there was never any reason to equate "undisturbed" to "unmonitored." And there is in any event no rationale what ever for permitting financial insitutions to keep hiding that form of information today -- now that contingent liabilities of this kind have come to dwarf certain liabilities in notional value.
All three of these proposals are aimed directly at features of the financial and regulatory environment publicly suggested by Democrats and Republicans alike to have played important roles in the financial earthquake of 2008 and the need at the time to afford massive "bailouts" in order to prevent full scale economic calamity. And all three, again, originate with the universally respected Republican Chairman of the Federal Reserve Board during most of President Reagan's time in office, the man who broke the back of the stagflation of the 1970s -- Paul Volcker. Recall a fourth proposal still on the cards -- the instituting of a new Consumer Financial Protection Agency charged with preventing abusive financial marketing practices associated with excessive subprime mortgage lending in the years leading up to 2008, long proposed by Harvard Law Professor Elizabeth Warren -- and you have in view a nice package of sensible finance-regulatory reforms that, at worst, fail to go far enough in reforming financial practice. (As I have argued here before and elsewhere, I don't think we'll avoid future crises absent a serious Fed commitment to return to the avowedly countercyclical role that it played during the tenure of William McChesney Martin, but I won't bang that drum again in this post.)
Now consider what Republican "strategists" are doing in response to the modest proposals of Warren, Volcker, and Obama nearly as quickly as they have been offered: Earlier this month, Republican strategist Frank Luntz issued a 17-page memo titled "The Language of Financial Reform." (More on it here: http://www.huffingtonpost.com/2010/02/01/frank-luntz-pens-memo-to_n_444332.html ) The language of the memo's title itself is telling: For one thing, it replicates that of an earlier memo that Luntz supplied Repuclicans as the health insurance reform debate began in earnest: That one was titled "The Language of Health Care." (You'll find it here: http://www.pnhp.org/news/2009/may/frank_luntzs_the_l.php ) For another thing, it makes plain from the get-go that Republicans are to concern themselves, not with financial reform, or the merits of various competing proposals for fianancial reform (the Republicans thus far have not proposed any), but with the way in which proposals are couched.
More specifically, Republicans are advised to "frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy." They also are encouraged to play up a policy line pursuant to which "the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated." The "bad decisions and harmful policies" are not specified, and most of us would presumably think the allusions made by such language to be to Bush era policies, but in Luntz's and other Republicans' world right now, "Bush" has become "Washington," and "Washington" is readily pinned, Pavlov-style, on Democrats now that they "control" Congress and the White House.
If you're already finding this chilling, please wait, there's more: In a particularly candid moment, Luntz goes so far as to say, "[p]ublic outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day ... Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout." And that, thus far, is about all we are seeing from Republicans when it comes to repairing the system of financial regulation under which our recent woes developed, festered, and erupted. The plan is simply to establish Pavlovian associations between reform proposals on the one hand, and the very harms against which those proposals are directed on the other. The second of the proposals described above, after all, is targeted among other things at bank size. And the first and third of the proposals are of course aimed precisely at putting an end to wrong-headed anti-regulatory policies embraced at the turn of the millenium just as real estate and associated financial markets were overheating.
Which takes us back to our theme. Surely it ought to be clear by now that there is little if any reason to suppose the Republican Party at present to be interested in the merits of any legislation proposed by the Obama Administration or the Democratic Caucus in Congress. And there is every reason to suggest that the Republicans' sole interest in any such proposal now is how best to bring it to pass that a substantial number of Americans unthinkingly associate it with something unpleasant -- and something unpleasant that, in all likelihood, was actually brought to us by the Republicans themselves as recently as a bit over a year ago.
What is the remedy for this kind of thing? Surely we need not tell the White House or the Democratic Caucus: It is to expose it. It is to expose it relentlessly -- to repeat and repeat the facts and the larger story that those facts embody, with the same, if not more, determination that the Republicans exhibit in relentlessly propagating their intentional falsehoods (yes, we know the briefer term for "intentional falsehoods"). There seems no reason, so far as I can tell, to do otherwise. If anything, the White House and the Democratic caucus are under a duty to all of us to bring the digusting truth here into the full light of day, before today's Republican Party succeeds in doing what the Republican Party through 2008 nearly succeeded in doing -- bringing the country to complete financial and political ruin.
One of our nation's most distinguished and, these days, lamentably underappreciated jurists -- a lawyer who was also a prophet of financial regulation whose advice, had it been taken, might have forestalled the financial frenzy of the 1920s -- bequeathed us a very nice slogan that seems to me to bear repeating here, not only in connection with finance, but also with the political process. I'm referring of course to Louis D. Brandeis, who memorably observed in his classic tract, Other People's Money and How the Bankers Use It, that "sunlight is the best disinfectant." I humbly suggest that President Obama and the Democrats in Congress begin seriously shining the light on the source of our present public policy debates' shared toxicity: that is the fact that there actually seems to be only one party to these debates, while the other party is engaged in nothing less than a concerted effort at mass-psychological manipulation in order that it might regain power and resume business as pre-2009 usual.
One of the more interesting features of Republican opposition to a variety of salutary proposals made by the Obama Administration and the Democratic Caucus in the Congress, I find, is that so many features of these proposals to which Republicans currently -- and flamboyantly -- object originate with ... well, Republicans themselves.
A particularly interesting case in point here is that of the "individual mandate" feature of the health insurance reform measures passed in the House and Senate shortly before the winter break. That is a feature about which Neil, I, and especially Mike here at DoL have written at length both here and elsewhere from a number of angles -- fiscal, financial, and constitutional alike. What is interesting about the mandate from the angle of vision I am adopting in this post is the fact that it was originally proposed as an alternative by Republicans -- Republicans then opposing early versions of the Clinton health care reform initiative in the early 1990s, some of whom remain in the Congress to this day and now oppose the mandate. Even more interesting, perhaps, is that the individual mandate has been supported as recently as this past autumn and several years ago, respectively, by such current Republican notables as Charles Grassley and Mitt Romney. See, e.g., http://www.politicsdaily.com/2009/08/24/individual-mandate-flies-under-the-radar/5, and http://www.opinionjournal.com/editorial/feature.html?id=110008213 . (Ironically, President Obama, for his part, opposed the individual mandate idea during the 2008 campaign, and appears to have embraced the idea in order to win more support for health insurance reform from Republican quarters and the insurance industry, as an offset for the additional costs that would be incurred by prohibiting preexisting condition exclusions.)
Notwithstanding the Republican origins of, and recent prominant Republican support for, the individual mandate, however, it has become the latest putative basis upon which Republicans now predicate their charges of Bolshevism on the part of proponents of "Obamacare." This curious change of tune -- as if "on a dime" -- naturally prompts an intriguing hypothesis: Could it be that Republican opposition to Democratic proposals right now are not actually about the perceived substantive merits of the proposals at all, but are in fact about inflicting failure upon the Obama administration and the current Democratic Congress? Certainly Republican Senator Jim DeMint's infamous "Waterloo" prognostication of this past summer -- http://www.youtube.com/watch?v=mHV4nDS501Y -- afforded reason enough to suspect something along these lines even before the latest Republican volte face on the individual mandate. But another, more recent case strikes me as affording the best case yet for concluding that the Republican Party has decided to throw policy merits entirely to the winds and concern themselves solely with getting the Cossacks into Paris, if I may take up Senator DeMint's Napoleonic simile.
The case to which I refer has to do with a particularly salient public policy concern -- namely, the reform of our regime of financial regulation. Many DoL readers will recall that, at the end of last month, President Obama announced his support for three new finance-regulatory measures recommended by Republican Paul Volcker, the former Federal Reserve Chairman now widely viewed, in the wake of Chairman Greenspan's diminished standing, as the last successful occupant of that hallowed office. It will be helpful first briefly to recapitulate those three proposals and preempt possible confusions about them. Then I will report on the most recent Republican reactions to them and to the other most widely reported proposal for finance regulatory reform -- the establishment of a new Consumer Financial Protection Agency.
With respect to the first proposal, which would place limitations upon commercial banks' proprietary trading activities, there is a widespread misperception that the 1999 repeal of Glass-Steagall's imposed "wall of separation" between commerical and investment banks was meant to permit commercial banks with federally insured deposits of ordinary folks' money to speculate in the financial markets with that money in the manner that investment banks do. But this is not so. What changed in 1999 was simply that federally insured commercial banks could now affiliate with -- i.e., could be owned by the same parent company as -- investment banks, on the understanding that the commercial banks themselves would continue to operate and be regulated as before. But this distinction itself has been steadily eviscerated by bank and bank holding company practices in recent years, and so President Obama and Former Fed Chairman Volker are best seen as taking the 1999 legislation at its word rather than as aiming to repeal it. That legislation -- Gramm Leach Bliley -- liberalized financial regulation, but did not end it. The Volcker-Obama plan is accordingly best viewed as, if anything, insufficiently ambitious -- too "conservative" -- in character, rather than as aimed at going back to the "over-regulatory 1990s." (I know. I share your temptation to guffaw.)
With respect to the second proposal, which was that the law take account of more forms of liability than deposits alone in determining bank market share, this too should have been viewed as a welcome response on the part of the regulatory regime to changes in the banking market. When we liberalized interstate banking and branching in the mid-1990s, we recognized the danger of excessive market concentration that this posed -- a danger that threatened consumers with oligopoly and the financial system with moral hazard rooted in bank growth to sizes thought too big to allow to fail. We responded to that danger at the time by prohibiting any bank from acquiring more than a 10% market share in deposits -- which was huge already. What has changed since then is that banks take on more forms of liability -- that is, they borrow from more sources -- than those owed to depositors alone. And the 10% market share limits applied to deposits have not been extended to these deposit-substitutes. The consequence is growth up to "too big to fail" size behind the scenes, so to speak. Finance-regulatory innovation must keep up with financial innovation, and this is precisely what the President's proposal would do. Please keep this one especially in mind when I turn to the current Republican reaction.
Finally, with respect to the third proposal of last month, that financial institutions be required to disclose all of their contingent liability exposures -- i.e., all of their financial derivative transactions -- just as they already are required to disclose all of their non-contingent liabilities, this too has been long, long overdue. Consumers and other participants in the financial economy, not to mention risk regulators, cannot rationally assess the value of prospective transactions with financial institutions -- including the reliability of investments in or through such institutions -- or the degrees or loci of systemic risk in the financial system if they know what such institutions already owe and are owed, but not what they might come to owe or be owed by virtue of contracual commitments. And the same reasons that prompt us to require disclosure of the first kind of information argue for requiring disclosure of the second kind. While there might -- might -- have been some reason to let the derivatives markets develop undisturbed in the late 1990s as they were just beginning to burgeon, there was never any reason to equate "undisturbed" to "unmonitored." And there is in any event no rationale what ever for permitting financial insitutions to keep hiding that form of information today -- now that contingent liabilities of this kind have come to dwarf certain liabilities in notional value.
All three of these proposals are aimed directly at features of the financial and regulatory environment publicly suggested by Democrats and Republicans alike to have played important roles in the financial earthquake of 2008 and the need at the time to afford massive "bailouts" in order to prevent full scale economic calamity. And all three, again, originate with the universally respected Republican Chairman of the Federal Reserve Board during most of President Reagan's time in office, the man who broke the back of the stagflation of the 1970s -- Paul Volcker. Recall a fourth proposal still on the cards -- the instituting of a new Consumer Financial Protection Agency charged with preventing abusive financial marketing practices associated with excessive subprime mortgage lending in the years leading up to 2008, long proposed by Harvard Law Professor Elizabeth Warren -- and you have in view a nice package of sensible finance-regulatory reforms that, at worst, fail to go far enough in reforming financial practice. (As I have argued here before and elsewhere, I don't think we'll avoid future crises absent a serious Fed commitment to return to the avowedly countercyclical role that it played during the tenure of William McChesney Martin, but I won't bang that drum again in this post.)
Now consider what Republican "strategists" are doing in response to the modest proposals of Warren, Volcker, and Obama nearly as quickly as they have been offered: Earlier this month, Republican strategist Frank Luntz issued a 17-page memo titled "The Language of Financial Reform." (More on it here: http://www.huffingtonpost.com/2010/02/01/frank-luntz-pens-memo-to_n_444332.html ) The language of the memo's title itself is telling: For one thing, it replicates that of an earlier memo that Luntz supplied Repuclicans as the health insurance reform debate began in earnest: That one was titled "The Language of Health Care." (You'll find it here: http://www.pnhp.org/news/2009/may/frank_luntzs_the_l.php ) For another thing, it makes plain from the get-go that Republicans are to concern themselves, not with financial reform, or the merits of various competing proposals for fianancial reform (the Republicans thus far have not proposed any), but with the way in which proposals are couched.
More specifically, Republicans are advised to "frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy." They also are encouraged to play up a policy line pursuant to which "the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated." The "bad decisions and harmful policies" are not specified, and most of us would presumably think the allusions made by such language to be to Bush era policies, but in Luntz's and other Republicans' world right now, "Bush" has become "Washington," and "Washington" is readily pinned, Pavlov-style, on Democrats now that they "control" Congress and the White House.
If you're already finding this chilling, please wait, there's more: In a particularly candid moment, Luntz goes so far as to say, "[p]ublic outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day ... Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout." And that, thus far, is about all we are seeing from Republicans when it comes to repairing the system of financial regulation under which our recent woes developed, festered, and erupted. The plan is simply to establish Pavlovian associations between reform proposals on the one hand, and the very harms against which those proposals are directed on the other. The second of the proposals described above, after all, is targeted among other things at bank size. And the first and third of the proposals are of course aimed precisely at putting an end to wrong-headed anti-regulatory policies embraced at the turn of the millenium just as real estate and associated financial markets were overheating.
Which takes us back to our theme. Surely it ought to be clear by now that there is little if any reason to suppose the Republican Party at present to be interested in the merits of any legislation proposed by the Obama Administration or the Democratic Caucus in Congress. And there is every reason to suggest that the Republicans' sole interest in any such proposal now is how best to bring it to pass that a substantial number of Americans unthinkingly associate it with something unpleasant -- and something unpleasant that, in all likelihood, was actually brought to us by the Republicans themselves as recently as a bit over a year ago.
What is the remedy for this kind of thing? Surely we need not tell the White House or the Democratic Caucus: It is to expose it. It is to expose it relentlessly -- to repeat and repeat the facts and the larger story that those facts embody, with the same, if not more, determination that the Republicans exhibit in relentlessly propagating their intentional falsehoods (yes, we know the briefer term for "intentional falsehoods"). There seems no reason, so far as I can tell, to do otherwise. If anything, the White House and the Democratic caucus are under a duty to all of us to bring the digusting truth here into the full light of day, before today's Republican Party succeeds in doing what the Republican Party through 2008 nearly succeeded in doing -- bringing the country to complete financial and political ruin.
One of our nation's most distinguished and, these days, lamentably underappreciated jurists -- a lawyer who was also a prophet of financial regulation whose advice, had it been taken, might have forestalled the financial frenzy of the 1920s -- bequeathed us a very nice slogan that seems to me to bear repeating here, not only in connection with finance, but also with the political process. I'm referring of course to Louis D. Brandeis, who memorably observed in his classic tract, Other People's Money and How the Bankers Use It, that "sunlight is the best disinfectant." I humbly suggest that President Obama and the Democrats in Congress begin seriously shining the light on the source of our present public policy debates' shared toxicity: that is the fact that there actually seems to be only one party to these debates, while the other party is engaged in nothing less than a concerted effort at mass-psychological manipulation in order that it might regain power and resume business as pre-2009 usual.