For a while there, up until, oh, about a month ago, it looked as if the red-hot lava of the financial crisis was finally cooling and that the White House’s appeasement strategy had succeeded.
Banks returned their TARP infusions with profits to spare for the government. The stock market found its legs. The housing market stopped imploding. And Federal Reserve chairman Ben Bernanke, God bless him, was Time magazine’s Person of the Year. Maybe, just maybe, 2010 would be the year that the excruciatingly dull complexities of postmodern banking vanish from the news and we get on with our lives.
So much for that. The news that some banks had booked massive profits for 2009 and were quietly preparing to pay bonuses commensurate with that performance was problem-you-can’t-sweep-under-the-rug No. 1. Problem-you-can’t-sweep-under-the-rug No. 2 was the Coakley debacle in Massachusetts. Quite suddenly, President Obama needed a dramatic and unambiguous policy initiative. And fortunately, he had the 82-year-old former Fed chairman Paul Volcker right there on staff, like an aging slugger ready to pinch-hit in a tight game.
In retrospect, it’s hard to figure why it took so long for the White House to grasp the political opportunities of anti–Wall Street populism. Even in good times, nobody likes bankers, or can understand why they’re paid so much, and in these bad times, it’s a miracle they haven’t been hounded through the streets. Now, thanks to Obama, we have the Volcker Rule, which seeks to restore commercial banking to a state of premodern purity by limiting the size of institutions and prohibiting them from risky “proprietary trading.” These measures have the clarifying ring of common sense as well as a punitive bite. They are based on the belief that regular lending is so vital to the economy that it must be roped off from anything that might impair the availability of credit—and, while we’re at it, maybe we can drive down the obscene compensation fueled by heedless risk-taking. In the short term, the Volcker Rule seems like an easy political score for the president. “If these folks want a fight,” he said, referring to the banks and lobbyists, “it’s a fight I’m ready to have.”
One small flaw in this plan is that in public, the banks won’t muster more than token opposition. They are utterly defenseless. The financial industry has been branded as testosterone-addled miscreants playing roulette with the life savings of schoolteachers and widows, and who will stand up for that? Not that there won’t be a few random shots fired back. There is already a lot of bellyaching on CNBC about Obama’s shattering the fragile confidence of the stock market. Aggrieved editorials are sure to appear in the business press about how the Volcker Rule imagines a fairy-tale past of solid-citizen bankers strolling the neighborhood at lunch and remembering the names of everybody’s dogs. Republican senators will issue grave warnings about the disastrous effects of government meddling in private enterprise. And maybe Jamie Dimon, whose lifework is at stake, will utter something untoward about the president at a banking conference, causing a day or two of headlines. But there won’t be the kind of old-fashioned throwdown that might juice Obama’s approval numbers. Instead, the banks will react like Saddam Hussein’s Republican Guard did at the onset of the Iraq War. They will take one look at the artillery aimed in their direction and wisely scatter to the wind.
The question then is what sort of insurgency of lawyers and lobbyists they’ll mount on Capitol Hill. They are liable to be orphaned by even their most staunch Republican backers, who presently hold what they consider a great hand—hammering Obama on health care and the lack of job growth. There’s no percentage in sticking their necks out for the banks. Outside the financial Establishment, the Volcker Rule runs afoul of no natural constituency and upsets not a soul.
So banking lobbyists will set to work on a stealth campaign to soften the reforms and riddle them with exemptions and loopholes. They will have an overwhelming strategic advantage in the fact that the genuine causes of the financial crisis are so poorly understood. If the size of institutions is at the core of the problem, what explains the 140, mostly tiny failed banks last year that cleaned out the reserves of the Federal Deposit Insurance Corporation? Was it really proprietary trading that drove banks to the brink, and if so, how do you define it in a way that still allows them to hedge and diversify their risks? Crafting these regulations is going to be a long, drawn-out process vulnerable at every step to sabotage and obfuscation.
Critical to the outcome will be how long it takes Obama to replace his economic team, if indeed he intends to replace it at all. In the immediate, reeling aftermath of the Coakley defeat, Bernanke’s renomination as Fed chief seemed in doubt, though it was rather quickly solidified. Rumors of Treasury Secretary Timothy Geithner’s imminent departure flared up yet again. The fact that the president bro-hugged him on the way to the podium at the State of the Union suggests that he won’t be walking the plank anytime soon. And as long as those two guys stay on, it’s hard to see how chief White House economic adviser Larry Summers gets shivved.
So for the time being, those responsible for pushing through Volcker’s reforms are going to be the very guys who, for many months, steadfastly kept Obama from embracing them. That’s not unprecedented in politics, of course, but this is no mere difference of opinion. It’s a philosophical divide between those who think banking regulations should merely be improved and those who think the whole nature of the business must be overhauled. It will be interesting to see the extent to which Volcker himself, now suddenly swimming with the tide of popular sentiment, is involved. Thirty years ago, as Fed chairman under Carter and Reagan, he was the apolitical “hard-money guy” who hiked interest rates up to 20 percent to squelch inflation, a move that, by today’s standards, seems unimaginably courageous. But even Volcker doesn’t see government as an equal match for the banks. In a Business Week interview in December, when he was still very much on the outskirts of administration policymaking, he said of the banks, “They will continue to try to get around all these restrictions. You have to have a much stronger supervisory and regulatory apparatus to have any chance of keeping up with that.”
They certainly will try—and may well succeed. Volcker has become an idealist in his old age. And idealists, he should know from his lifetime of Washington experience, don’t usually last long in that town.