A Financial War With Two Fronts ... And One Wrong General

Quick overview: Larry Summers -- wrong about the risks; didn't see the last crisis coming. Nouriel Roubini -- right about the risks; predicted the last crisis. Who are you gonna believe?
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Things have been moving pretty quickly lately in the interlocking worlds of politics and financial reform. While there is a lot we don't know, here are three statements we can probably make with a high degree of certainty:

1. If the banks had been on the ballot yesterday voters in both parties would've voted them down.
2. A couple of determined senators can make a difference.
3. If you want to rally the troops, don't use Larry Summers as your general.

I liked Zach Carter's framing of today's Senate action as a "war on Wall Street reform," which I suppose makes anybody covering this conflict a war correspondent. So excuse me while I throw on this little dust-colored field jacket, the one with the shiny buckles and military-style epaulets, to summarize the action on these two fronts. (Since we're going all CNN-like here, here's a quick commercial: Zach and I will both be at the Campaign for America's Future conference June 7-9, along with luminaries galore like Nancy Pelosi, Arianna, Kos, Howard Dean, etc; much discussion of this topic will ensue. Join us!)

Back to our regularly scheduled programming: Nate Silver's overall conclusion about the key races seems right -- the conventional wisdom about what these races "mean" isn't necessarily all that accurate. That said, there does seem to be a through-line, at least in the Rand Paul and Joe Sestak races, of repudiation for insider Washington politics and its 'centrist' assumptions. And what's more 'centrist' in Washington than the assumption that we need to shy away from major reform of the banking system? (The 61/33 vote against the Brown/Kaufman amendment to break up the big banks -- the single most important reform we need -- represented the most 'bipartisan' endorsement of Wall Street and its campaign dollars that we've seen in some time.)

Nevertheless, less than 24 hours after the polls closed, the Senate leadership moved to end debate on financial reform, without even discussing some of the most critical remaining initiatives. Maybe they weren't watching the election returns, which showed that clubby insider politics is pretty unpopular right now. Whatever the reasons, the cloture vote failed and (at least for now) the amendments will be discussed and voted on. Not that they can't be voted down or killed by fiat (in conference or through a "manager's amendment"). But for now, those amendments live.

Maybe the Republican leadership didn't get the memo. They used procedural tricks to stall the Whitehouse amendment, which would allow states to set interest rates for their citizens. (Funny how that "states' rights" talk goes out the window when somebody flashes a few Benjamins.) They gave big gimmes to the predators in the payday loan industry by blocking the Hagan Amendment. And their parliamentary shenanigans forced Merkley and Levin to attach their amendment -- which prevents banks from gambling with publicly-backed cheap money -- to Sam Brownback's giveaway to auto dealers.

What an opportunity for Democrats to capitalize on the populist surge and use public anti-bank sentiment to enact real change! Unless, of course, they do .... what they did, which is yield to the GOP and try forcing the bill through as is. It's understandable, in one way -- if Republicans are paralyzing the Senate to protect the banks, many Democratic senators no doubt felt they should get what they can. Senators like Levin and Dorgan, who threatened to oppose this vote, were no doubt promised some improvements in the bill. So they're not "bad guys" -- but they did miscalculate: They assumed that progressive senators would eventually cave. They won over their two favorite Republicans, Sens. Snowe and Collins, but lost Feingold and Cantwell.

Feingold and Cantwell did the right thing. Snowe and Collins are the same two Republicans who held healthcare reform hostage for weeks and eventually provided no meaningful support. By forcing the leadership to negotiate with the left as well as the 'moderate' right, these two senators may have changed the future of financial reform for the better.

How important is Merkley/Levin? Now that Brown/Kaufman has gone down, it's the most important provision left. Without it the entire system remains at risk, as giant banks continue to engage in high-risk trading on their own behalf. That's the kind of activity that could cause another disaster, and which probably explains how four mega-banks went an entire quarter without losing money on trades ... while the clients that take their advice fared far worse. The Hagan and Whitehouse Amendments are also important, and they deserve a full vote in the Senate.

As for Larry Summers, the Administration sent him to the Senate yesterday to make a patently false claim: "If you vote for cloture right now and don't add any more amendments, we will have solved the issues that led to (the last) crisis." The bill improves upon the status quo, but Summers is making a much broader claim, which he then repeated: "Had this been law, as is, in 2007, we would not have had the crisis." Nobody really believes that -- least of all Nouriel Roubini, who said the reform bill's changes were "cosmetic" and that "there is a risk of ending up in another crisis, as the world found itself in the Depression of 1933."

Summers recently defended his miscalculations during the Clinton Administration by saying "Credit default swaps were in their infancy in the 1990s. There was no large market in them ..." In other words, all the animals were inside the barn when I opened the door. How could I know they'd get loose?

Quick overview: Larry Summers -- wrong about the risks; didn't see the last crisis coming. Nouriel Roubini -- right about the risks; predicted the last crisis. Who are you gonna believe? Besides, if there's one thing you could probably get Rand Paul voters in Kentucky and most Joe Sestak voters in Pennsylvania to agree upon, it's lack of confidence in Larry Summers (along with Geithner et al.)

With that choice of general, no wonder the Administration and the Senate leadership lost today's battle. The question now is, can they find the strategy ... and the generals ... needed to win the war? Here are the names of two officers who might deserve a field promotion: Russ Feingold and Maria Cantwell.


Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."

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