Obama did none of it.
This is a critical point. On the matter of dealing with Wall Street, there was no conflict between idealism and pragmatism. The high-minded and Jeffersonian move, in this case, would have also been the practical move, the policy that would have been healthiest for the nation, the one that would have paid off best in the crude terms of public opinion polls.
And still he didn’t do it. He didn’t even try. In fact, Obama’s team did the opposite. They did everything they could to “foam the runways” and never showed any real interest in confronting the big banks.
Obama didn’t play the greatest of all issues the way he did because getting tough with Wall Street would have looked bad or because the presidency lacks sufficient power. Everything I just mentioned was eminently doable in 2009. Putting banks into receivership is a common and even sometimes necessary legal procedure. The country was begging Obama to do it. But he chose not to.
Once we acknowledge this, we must acknowledge the possibility that Obama and his team didn’t act forcefully to press an equality-minded economic agenda in those days and in the years that followed because they didn’t want to. That he and they didn’t do many of the things their supporters wanted them to do because they didn’t believe in doing those things. It wasn’t because the ocean liner would have been too hard to turn, or because those silly idealists were unrealistic; it was because they didn’t want to do those things.
8
The Defects of a Superior Mind
Let us now examine in detail each of President Obama’s three big legislative victories, which he won in the two years before the Democrats lost control of Congress in the 2010 elections: The big stimulus package of 2009, the Dodd-Frank banking measure, and the landmark Affordable Care Act. In certain remarkable ways, each of these legislative achievements followed the same characteristic pattern—one that diminishes their effectiveness but allows Democrats to pursue the professional consensus they crave.
THE ENDS OF COMPLEXITY
All of them, for starters, chose complexity over straightforwardness. The virtue of the old Glass-Steagall Act, which regulated the banking industry from 1933 until its final repeal in the Clinton era, was its simplicity: It structurally separated investment banking from commercial banking and forced those parts to compete with one another. The 2010 Dodd-Frank Act, which was supposed to re-regulate the business, uses a different method—it instructs federal agencies to make detailed new rules for the industry. As I write this, the agencies have finished about two-thirds of that task, with their regulatory work now running to a staggering 22,000 pages of rules, loopholes, and exceptions.
This intricacy does not make Dodd-Frank an outlier among Obama-era reforms; this makes it typical. The Affordable Care Act is even more profoundly dizzying. On the matter of reforming the country’s health care system, there were in 2009 two admirably straightforward proposals on the table: a Canadian-style single-payer system and the briefly popular “public option,” in which the government itself would provide competition to existing health insurance companies. President Obama had publicly declared his support for both these choices over the years. Neither won the favor of Obama’s all-important proxy on this issue, however, by which I mean former Senator Max Baucus, Democrat of Montana, a notable friend of the lobbyist and (as of this writing) the U.S. ambassador to China.
Instead we got Obamacare, with its exchanges, its individual and employer mandates, its Cadillac tax, its subsidies to individuals and to the insurance industry, and its thousands of other moving parts, sluicing funding this way and that. Complexity is its most striking characteristic. No one is really certain how it operates, whether it is a tax or a mandate (OK, the Supreme Court has determined that it’s the former), or whether it will truly make health care more affordable. In a video clip accessible on YouTube, Democratic Senator Jay Rockefeller can be seen describing Obamacare as “the most complex piece of legislation ever passed by the United States Congress”; a former state health-insurance official in Massachusetts, whose health care system was Obama’s model, moaned that “We took the most complex health care system on God’s green earth, and made it 10 times more complex.”1
Why did Team Obama choose to go this route? One explanation is suggested by the infamous remarks of Obamacare consultant Jonathan Gruber, an MIT economist who was videotaped telling an academic conference in 2013 that the law was deliberately “written in a tortured way” with a “lack of transparency” that was meant to confuse evaluators and thus get it past the clueless and bewildered public. (Gruber’s exact phrase was “the stupidity of the American voter.”2) This is repugnant, but it seems plausible. We know that complexity serves exactly this purpose in other branches of professional practice—think of the baffling opacity of Wall Street’s technical dialect, which is designed to make outside scrutiny difficult if not impossible. Why not here, too?
Had fairness and greater equality been the primary goals of either Obamacare or Dodd-Frank, they would no doubt have been far more straightforward. But complexity allowed Obama to square the circle of modern liberalism. It allowed him to achieve the double mandate of making health care more affordable while preserving existing players at the same time. A single-payer system would obviously have done grave damage to the insurance industry, while a public option would have given it unwelcome competition. But Obamacare did the opposite—it made those insurers into a permanent feature of the economic landscape. Their enthusiasm for the measure was obvious and much discussed at the time, as was that of Big Pharma: Obamacare essentially made our patronage of these industries mandatory.
A forgotten school of left-wing historians used to argue that the regulatory state began not with public-minded statesmen cracking the whip and taming big biz, but just the opposite—with business leaders deliberately inviting federal regulation as a way to build barriers to entry and give their cartels the protection of law. Long-ago giants of steel, tobacco, telephones, and meatpacking all welcomed federal regulation because of the effects it would have on smaller competitors. That old style of regulation brought ancillary benefits to the public, of course: better food, a standardized phone system. But its main objects were stability for existing businesses and guaranteed profits in perpetuity.3
Certain events surrounding the advent of Obamacare have resurrected this scary hypothesis. In the summer of 2009, PhRMA, the lobby of the big pharmaceutical companies, aggressively supported the president’s health care proposal. In exchange for their support, the administration had made a deal barring any possibility of drug reimportation from Canada, a country with a sane health care system.
Nevertheless, in July of that year, President Obama chose to describe opponents of his reform as people desperate to preserve “a system that works for the insurance and the drug companies.” This gave the proceedings an air of populist drama that they otherwise lacked, but it hurt the feelings of the PhRMA lobbyists. It seems they were sensitive souls. Didn’t the president know they were on his side? Thanks to emails later released by the House Energy and Commerce Committee, we know that the folks from PhRMA visited the White House and demanded an explanation. As a PhRMA lobbyist described the scene,
Then Rahm came in. Among other things, said very positive things about what we were doing and said “I know you are swimming in different waters. I take personal responsibility for that error. As you know, this is out of character for what the President has been saying since we made our deal.”4
This is not to say that the “deal” Obama made with PhRMA was altogether without merit, only that it was a deal, a deliberate swap in which a chance for a truly democratic health care system was parlayed into the opposite.
The deal that the financial industry secured from the Democrats wasn’t quite as rich, but in it we can see traces of the same impulse. In the Obama administration’s early years, you will recall, the Wall Street banks were regarded as “too big to fail,” their health essentially guaranteed by the federal government
even though many of them appeared to have been neck-deep in fraudulent activity during the bubble days. Dodd-Frank was supposed to change this: being a “systemically important financial institution” now carried special regulatory obligations with which lesser banks did not have to comply.
The objective of the law’s tortuous complexity was again to allow us to have it both ways—to leave the big banks intact and to render them harmless at the same time. Dodd-Frank goes about reforming the banks by outlawing many of the specific practices that were implicated in the housing bubble and the financial crisis, thus generating the tens of thousands of pages of rules and exceptions that are the law’s most remarkable feature. At the same time, however, Dodd-Frank leaves the banks themselves standing, and it does little to alter the more fundamental conventions of modern banking—like ballooning compensation—that gave rise to the madness in the first place. As the regulatory expert Bill Black says, it is like trying to achieve gun safety by banning the specific caliber of ammunition that was used in the latest massacre. It won’t be difficult for the villains to find a different way to get what they want.
Structural reform would actually have been much simpler, since much of it could have been accomplished by carefully rolling back the deregulations of the Clinton and Reagan years. Such a reform would have been far-reaching, too. But as it stands, Dodd-Frank does little to tackle the greater problem of the financial sector swallowing the real economy, although that was obviously what the times called for and although taking the banks apart would no doubt have done much to reverse the ever-growing wealth of the One Percent. Instead, Wall Street executives are still among the wealthiest people in the land; their lobbyists are still like a small army besieging Capitol Hill; and with their campaign contributions and their friendly persuasiveness they are industriously writing loopholes and exceptions into the fiendishly complicated and yet still unfinished new law.
AMONG THE SERIOUS
In the early days of the Obama administration, as we have seen, there was a healthy Ivy League delegation in the executive branch; as the years went on, the administration grew even more selective, even more closely focused on professional status as it is defined by a tiny group of institutions. As of this writing, fully two-thirds of President Obama’s cabinet-level officers are products of these elite schools; all but three of them have graduate degrees.5 For the rest of us, this should serve as a cue to inquire a little more carefully into the phenomenon of genius-in-government. Of what does these people’s brilliance really consist?
It is not book-learning alone. Consider Larry Summers: during the two years when he worked at D. E. Shaw, the hedge fund that is thickly populated with chess champions and math Olympians, he is known to have made some $5.2 million. In exchange for this, he reportedly worked one day a week at tasks that have been described as standing somewhere between trivial and ornamental. Do the math and that comes out to about $52,000 a day—more than the average American household earns in an entire year.6
Stints like this turn out to be a frequent item on the résumés of Obama’s leadership clique, almost as common as the Ivy League educations and advanced degrees that so impressed the nation’s pundits in the administration’s early days. Rahm Emanuel, the president’s first chief of staff, had also spent a brief period in investment banking, during which he amassed a sum several times greater than Summers’s. Bill Daley, the man who replaced Emanuel, had passed many years at JPMorgan, while Jack Lew, who eventually replaced Daley (before going on to run the Treasury Department), had previously directed a Citibank group that invested in hedge funds. Michael Froman, the president’s trade representative, also came from Citibank.
Other Obama officials worked the equation in reverse. Tim Geithner, the Treasury secretary during the crisis years, serves today as president of Warburg Pincus, a private equity firm. Obama’s first director of the Office of Management and Budget, Peter Orszag, left government for a job at Citibank. Gene Sperling, a director of the National Economic Council, signed up with PIMCO, as did Ben Bernanke, Obama’s first Fed Chairman; White House Counsel Gregory Craig opted for Goldman Sachs; and the incorrigible Daley worked it at both ends, choosing post–White House to join Argentière Capital, a hedge fund based in the Swiss city of Zug.
Thus did the Party of the People turn the government over to Wall Street in the years after Wall Street had done such lasting damage to … well, the People. The classic explanation for this perverse act is the donations the banks made to Obama’s campaign in 2008. But there’s another, and it takes us deep into the shared predilections of the liberal class: Obama deferred to Wall Street in so many ways because investment banking signifies professional status like almost nothing else. For the kind of achievement-conscious people who filled the administration, investment bankers were more than friends—they were fellow professionals; people of subtle minds, sophisticated jargon, and extraordinary innovativeness. They were the “creative class” that Democrats revere.
What I am suggesting is that the liberal class’s unquestioning, reflexive respect for professional expertise was an impediment to thinking rationally about Wall Street. It blinded the Democrats to the problems of megabanks, to the need for structural change, and to the epidemic of fraud that overswept the business.
Washington’s professional deference to Wall Street comes up again and again in accounts of the Obama era. Neil Barofsky, for example, found it at work in the Treasury Department, where no one would question the industry’s basic assumptions about merit and compensation:
The Wall Street fiction that certain financial executives were preternaturally gifted supermen who deserved every penny of their staggering paychecks and bonuses was firmly ingrained in Treasury’s psyche. No matter that the financial crisis had demonstrated just how unremarkable the work of those executives had turned out to be, that belief system endured at Treasury across administrations. If a Wall Street executive was contracted to receive a $6.4 million “retention” bonus, the assumption was that he must be worth it.7
Thus did meritocracy subvert reform. Jargon also helped. Elizabeth Warren tells how Wall Street’s simulation of professional expertise helped to bamboozle members of Congress:
Financial reform was complicated, and the bank lobbyists used a clever technique: They bombarded the members of Congress with complex arguments filled with obscure terms. Whenever a congressman pushed back on an idea, the lobbyists would explain that although the congressman seemed to be making a good point, he didn’t really understand the complex financial system.… It was the ultimate insider’s play: Trust us because we understand it and you don’t.8
Then there was the aura of financial worldliness with which liberal groupthink surrounded itself. As with trade issues, which always seem to come down to a clash between the educated against the ignorant, the administration’s policymaking professionals regarded the demand for breaking up too-big-to-fail banks as hopelessly unsophisticated—even when the argument was made by no less an authority than former Fed Chairman Paul Volcker. Jonathan Alter captures this feeling exactly when he writes, “To the policy mandarins, who believed from the beginning of their academic training in the merits of financial engineering, Volcker’s argument wasn’t serious.”9
And seriousness is the coin of the realm in Washington, a city that finds Wall Street’s simulation of professional solemnity to be highly convincing, what with its impenetrable technical dialect and its advanced financial instruments. So complex are the latter, one deputy U.S. attorney general complained in 2014, that when examining them, “we are dealing with financial rocket science.”10
The economic expertise of Wall Street’s analysts, strategists, and traders is taken for granted in Washington. This belief seeps into all corners of life in the capital. Consider the words of White House Press Secretary Jay Carney, who advocated for a payroll tax cut in 2011 by referencing “responsible economists,” by which he meant “not adjuncts of one party or the other, or people from partisan think tanks
, but economists on Wall Street, economists out in the country and academic economists who are not affiliated with a party or a position.…”11 What is interesting here is Carney’s assumption, three years after the financial crisis, that “Wall Street” shares the high ground of respectability with academia. It is not a synonym for “criminal,” but the opposite: a signifier of legitimacy.
Public officials aren’t supposed to wreck this highly creative industry by regulating its operations or capping its compensation scales or putting its great institutions into receivership; they are supposed to respect it. To forgive its peccadilloes. To nurture its innovations. To let it know that it need never fly to London or Zurich. This is professional courtesy on a level so elementary it shouldn’t even require thought.
CONSENSUS OF THE WILLING
All the things I have mentioned so far—the fascination with complexity, the desire to preserve existing players, the genuflection before expertise—all of them arise from one of the deepest wellsprings of liberal thought and action: the longing for a grand consensus of the professional class that never seems to come. We saw an earlier version in Bill Clinton’s presidency, but Barack Obama displayed a passion for reaching an understanding with his foes that was at times embarrassing to behold. The president borrowed big chunks of his health care reform plan, for example, from the conservative Heritage Foundation and from a plan proposed by Republicans back in the 1990s. He struck deals with the insurance companies, the medical profession, and Big Pharma. He and his team then sat vainly for months waiting for a Republican to sign on to the plan and thus certify it as “bipartisan.” In the very speech that so affronted the thin-skinned men of PhRMA, Obama also boasted that “we’ve forged a level of consensus on health care that has never been reached in the history of this country.”12
Listen, Liberal: Or, What Ever Happened to the Party of the People? Page 15