Ever since the start of the banking crisis in 2008, Dimon had been arguing that more government regulation of Wall Street was unnecessary. In 2011 he vehemently and loudly opposed the so-called Volcker Rule, itself a watered-down version of the old Glass-Steagall Act—the Depression-era law that had separated investment banking (betting in the financial casino) from commercial banking (taking in deposits and lending them out). Glass-Steagall’s repeal in 1999 had allowed bankers to place large bets with other people’s money—and make huge windfalls for themselves. It also led to the near meltdown of the Street in 2008. Even then the Street fought against resurrecting Glass-Steagall, accepting the Volcker Rule as a compromise. But Dimon had insisted even the Volcker Rule went too far. It would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets).
Dimon argued the financial system could be trusted, that the near meltdown of 2008 was a perfect storm that would never happen again. “Most of the bad actors are gone,” he said. “Off-balance-sheet businesses are virtually obliterated,” “money market funds are far more transparent,” and “most very exotic derivatives are gone.” JPMorgan’s lobbyists and lawyers then did everything in their power to eviscerate the Volcker Rule—creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near meltdown. By the time of Dimon’s announcement of JPMorgan’s trading losses, the rule had morphed into almost three hundred pages of regulatory mumbo jumbo and still hadn’t been finalized.
In light of all this, Dimon’s promise in May 2012, after revealing billions of dollars of losses from risky trades, that JPMorgan would “fix it and move on” was not reassuring. Here we were—less than four years after a banking crisis had forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression—and JPMorgan recapitulated the whole debacle with the same kinds of errors, sloppiness, and bad judgment, and the same excessively risky, poorly executed, and poorly monitored trades, that had caused the crisis in the first place.
JPMorgan’s losses had been mounting for at least six weeks, according to the bank. Where was the new transparency that was supposed to allow regulators to catch these things before they got out of hand? Where were the regulators who were supposed to be “embedded” in the big banks in order to stop such excessively risky trades from occurring? Several weeks before Dimon’s announcement, there had been rumors about a London-based JPMorgan trader making huge high-stakes bets, causing excessive volatility in derivatives markets. When asked about it at the time, Dimon called it “a complete tempest in a teapot.” Using the same argument he had used to fend off regulation of derivatives, he told investors that “every bank has a major portfolio” and “in those portfolios you make investments that you think are wise to offset your exposures.”
Meanwhile, even the portion of the Dodd-Frank law that was supposed to be in effect was barely being enforced. That’s because the agencies charged with enforcing it, including the Securities and Exchange Commission, didn’t have enough money or staff to do the job. The Street’s Washington lobbyists had made sure Congress didn’t appropriate even these bare necessities. By late 2012 several of these agencies still lacked directors or commissioners. Ironically, many of the business leaders who blamed the sluggish economy on “regulatory uncertainty” were the same ones who kept financial regulation in limbo. A senior vice president of the Chamber of Commerce told The New York Times, “Uncertainty among companies about the rules of the road is keeping a lot of capital on the sidelines.” Yes, and the Chamber of Commerce was among the groups most responsible for maintaining uncertainty about Dodd-Frank’s final regulations.
The problem isn’t excessive greed. If you took the greed out of Wall Street, all you’d have left is pavement. The problem is the Street’s excessive power. Wall Street is the richest and most powerful industry in America with the closest ties to the federal government, routinely supplying Treasury secretaries and economic advisers who share its worldview and its financial interests and routinely bankrolling congressional kingpins. How else can you explain why the Street was bailed out with no strings attached? Or why taxpayers didn’t get equity in the banks we bailed out—as Warren Buffett got when he bailed out Goldman Sachs—so when the banks became profitable again, we didn’t get any of the upside gains? Or why no criminal charges have been brought against any major Wall Street figure—despite the effluvium of frauds, deceptions, malfeasance, and nonfeasance in the years leading up to the crash and subsequent bailout? Or why Dodd-Frank is being eviscerated?
Since Dodd-Frank was enacted, Wall Street has spent as much on lobbyists and what amount to political payoffs designed to stop the law’s implementation as it did trying to water down the law in the first place. The six largest banks spent $29.4 million on lobbying in 2010, and even more in 2011. According to the Center for Public Integrity, the Street and other financial institutions hired roughly three thousand lobbyists to fight Dodd-Frank—more than five lobbyists for every member of Congress. They hired almost the same number to delay, weaken, or otherwise prevent its implementation.
As a presidential candidate, Mitt Romney, who promised to seek repeal of Dodd-Frank if elected, received more money from securities, investment, banking, and other bastions of finance than from any other industry. Barack Obama, having pushed Dodd-Frank, received far less of Wall Street beneficence in his bid for reelection. Nonetheless, big finance has remained the single largest source of cash for the national Democratic Party’s various campaign committees, contributing even more than the traditionally pro-Democratic entertainment industry.
Yet the largest part of the Street’s political efforts are almost entirely hidden from view, occurring within regulatory and legal processes that run beneath Washington like a giant system of underground plumbing. In 2012 the Street’s biggest lobbying groups filed a lawsuit against the Commodity Futures Trading Commission seeking to overturn its new rule limiting speculative trading in food, oil, and other commodities. Wall Street profits greatly from these bets, but they raise consumer costs—another redistribution from the middle class and the poor to the top. The Street argued the commission’s cost-benefit analysis wasn’t adequate. It was a clever ploy because there’s no clear legal standard for an “adequate” weighing of costs and benefits of financial regulations since both are so difficult to measure. And putting the question into the laps of federal judges gave the Street a major tactical advantage because the Street has almost an infinite amount of money to hire so-called experts who will say benefits have been exaggerated and costs underestimated, while the commission’s budget is limited.
The Street used the same ploy in 2011 after the Securities and Exchange Commission (SEC) tried to make it easier for shareholders to nominate company directors. Wall Street argued that the SEC’s cost-benefit analysis was inadequate. In July 2011, a federal appeals court—inundated by Wall Street lawyers and hired-gun “experts”—agreed with the Street. So much for shareholder rights.
Obviously, government should weigh the costs against the benefits of anything it does. But when it comes to regulating Wall Street, one big cost doesn’t make it into any individual weighing: the public’s mounting distrust of our entire economic system, generated by the Street’s repeated abuse of the public’s trust. Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged. Yet capitalism depends on trust. Without trust, people avoid even sensible economic risks. They also begin trading in gray markets and black markets. They think that if the big guys cheat in big ways, they may as well begin cheating in small ways. And when they think the game is rigged, they’re easy prey for political demagogues with fast tongue
s and dumb ideas.
Wall Street has blanketed America in a miasma of cynicism, and much of it is directed against Wall Street. The Street has only itself to blame. It should have welcomed new financial regulations as a means of restoring public trust. Instead, it’s been busily shredding new regulations and making the public more distrustful than ever. The cost of such cynicism has leeched deep into America, finding expression in Tea Partiers and Occupiers and millions of others who think the Street has sold us out.
WHOM IS THE ECONOMY FOR, ANYWAY?
All of this raises the basic question of whom the economy is for. Surely it’s not just for a few Wall Street executives and traders or a handful of managers of hedge funds and private-equity funds, and not just for big corporations and their CEOs. The success of our economy cannot be measured by how fast the GDP grows or how high the Dow Jones Industrial Average rises, because in an economy like ours very few of the gains from growth or from a rising stock market are trickling down to most people.
The economy’s success can’t be measured by the unemployment rate, either. As I’ve emphasized, that rate doesn’t take account of declining wages. Nor does it account for all the people who have become too discouraged to look for work because there are no jobs for them, and all those who are working part-time who want and need full-time jobs, or the growing ranks of contract workers, temporary workers, and others living from paycheck to paycheck with no job security at all.
Our economy’s success can’t even be measured by whether average incomes are turning upward. An average can disguise what’s happening to the majority because averages are pulled up by the top, and when the top is exceptionally high, the average can be far better than what most people experience. Shaquille O’Neal and I have an average height of six feet.
Even if most Americans are able to buy more, our lives will not improve if our schools, parks, roads, air and water, and other public goods continue to deteriorate. We won’t feel better off if our workplaces are unsafe, if we have no regular access to medical care, or if the cost of a major illness can wipe out our savings. And our lives will not be better if our democracy is dying, replaced by a system mostly responsive to big corporations and wealthy individuals.
An economy should exist for the people who inhabit it, not the other way around. The purpose of an economy is to provide everyone with opportunities to live full, happy, and productive lives. Yet when most people come to view the economic game as rigged, this most basic purpose cannot be achieved. It is impossible to live happily in a society that seems fundamentally unfair or to live well in a nation rife with anger and cynicism.
Part Two
The Rise of the Regressive Right
People who call themselves conservative Republicans offer one option for what to do about all this, but their option would make matters worse. Their goal is not to conserve the best of what we now have; it is to return America to a time long before we achieved it. In truth, their agenda is regressive rather than conservative. They believe in social Darwinism, and many will stop at nothing to get their way. Their strategy is to divide working Americans, to talk about private morality instead of public morality, and to convince Americans of the truth of a few very big lies.
THE REBIRTH OF SOCIAL DARWINISM
A fundamental war has been waged in this nation since its founding between progressive forces pushing us forward and regressive forces pulling us backward. We are in that battle once again.
Progressives believe in openness, equal opportunity, and tolerance. Progressives assume we’re all in it together: We all benefit from public investments in schools and health care and infrastructure. And we all do better with strong safety nets, reasonable constraints on Wall Street and big business, and a truly progressive tax system. Progressives worry when the rich and privileged become powerful enough to undermine democracy.
Regressives take the opposite positions. In 2012 their most prominent members were the House majority leader, Eric Cantor; the House budget chief, Paul Ryan; the former Speaker Newt Gingrich; the former senator Rick Santorum; the former majority leader Dick Armey; Governor Rick Perry of Texas; Representative Michele Bachmann of Minnesota; the former Alaska governor Sarah Palin; Representative Ron Paul of Texas; and the former Massachusetts governor and Republican presidential candidate Mitt Romney; along with the antigovernment guru Grover Norquist, several Fox News anchors, the Supreme Court justices Antonin Scalia and Clarence Thomas, and the Republican strategist Karl Rove. Behind them—funding their activities but carefully remaining out of the spotlight—are the media mogul Rupert Murdoch, the billionaires Charles and David Koch, and a coterie of other big-moneyed interests on and off Wall Street who view the regressive movement as their best means of maintaining their power and privilege and accumulating even more.
Many of these people would like to return America to the 1920s—before Social Security, unemployment insurance, labor laws, the minimum wage, Medicare and Medicaid, worker safety laws, the Environmental Protection Act, the Glass-Steagall Act, the Securities Exchange Act, and the Voting Rights Act. In the 1920s, Wall Street was unfettered, the rich grew far richer and everyone else went deep into debt, and the nation closed its doors to immigrants. These regressives also want to resurrect the classical economics of the 1920s—the view that economic downturns are best addressed by doing nothing until the “rot” is purged out of the system (as Andrew Mellon, Herbert Hoover’s Treasury secretary, so decorously put it).
Many would even like to take the nation back to the late nineteenth century—before the federal income tax, antitrust laws, the Pure Food and Drug Act, and the Federal Reserve. It was a time when so-called robber barons—railroad, financial, and oil titans—ran the country; a time of wrenching squalor for the many and mind-numbing wealth for the few, when the federal government was small, the Fed and the Internal Revenue Service had yet to be invented, state laws determined worker safety and hours, evolution was still considered contentious, immigrants were almost all European, big corporations and robber barons ran the government, the poor were desperate, and the rich lived like old-world aristocrats. It was an era when the nation was mesmerized by the doctrine of free enterprise but few Americans actually enjoyed much freedom. The financier Jay Gould, the railroad magnate Cornelius Vanderbilt, and the oil tycoon John D. Rockefeller controlled much of American industry; the gap between rich and poor had turned into a chasm; urban slums festered; children worked long hours in factories; women couldn’t vote, and black Americans were subject to Jim Crow; and the lackeys of the rich literally deposited sacks of money on desks of pliant legislators.
Most tellingly, it was a time when the ideas of William Graham Sumner, a professor of political and social science at Yale, dominated American social thought. Today’s Republican right deploys the same social Darwinism that Sumner used more than a century ago to justify the brazen inequality of the Gilded Age: survival of the fittest. Don’t help the poor or the unemployed or anyone who’s fallen on bad times, they say, because this only encourages laziness. America will be strong only if we reward the rich and punish the needy. Sumner brought Charles Darwin’s thinking to America and twisted it into a theory to fit the times. Few Americans living today have read any of Sumner’s writings, but they had an electrifying effect on America during the last three decades of the nineteenth century.
To Sumner and his followers, life was a competitive struggle in which only the fittest could and should survive, and through this struggle societies became stronger over time. A correlate of this principle was that government should do little or nothing to help those in need because that would interfere with natural selection.
Listen to today’s Republicans and you hear a continuous regurgitation of Sumner. “Civilization has a simple choice,” Sumner wrote in the 1880s. It’s either “liberty, inequality, survival of the fittest” or “not-liberty, equality, survival of the unfittest. The former carries society forward and favors all its best members; the latter carries society dow
nwards and favors all its worst members.” Sound familiar?
Mitt Romney isn’t as regressive as some, but like Herbert Hoover, he doesn’t want the government to do much of anything about unemployment. As I said earlier, in the 2012 presidential campaign Romney accused President Obama of having created an “entitlement society” that has fostered a culture of dependence. Romney thinks government shouldn’t try to help distressed homeowners but instead let the market “hit the bottom.” And he is dead set against raising taxes on millionaires, relying on the standard Republican rationale that millionaires create jobs and that benefits trickle down.
Rick Santorum, another prominent Republican who was among the front-runners in the GOP 2012 presidential primary, accused the president of getting America hooked on “the narcotic of dependency” and alleged the reason we have high unemployment is that people are deliberately staying out of the workforce in order to get unemployment benefits. “When you have ninety-nine weeks of unemployment benefits and a variety of other social safety-net programs, people can make choices that they otherwise wouldn’t make.”
Newt Gingrich, another primary contender, not only echoes Sumner’s thoughts but mimics his reputed arrogance. Gingrich says we must reward “entrepreneurs” (by which he means anyone who has made a pile of money) and warns us not to “coddle” people in need. In the GOP primary he called laws against child labor “truly stupid” and said poor kids should serve as janitors in their schools. He doesn’t want to extend unemployment benefits, because, he says, “I’m opposed to giving people money for doing nothing.”
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