Pragmatism in Pursuit of What? On Financial Reform, Differences in Goals

The Wall Street sign near the front of the New York Stock Exchange August 5, 2011.  AFP PHOTO/Stan HONDA        (Photo credit
The Wall Street sign near the front of the New York Stock Exchange August 5, 2011. AFP PHOTO/Stan HONDA (Photo credit should read STAN HONDA/AFP/Getty Images)

Of course we need hardheaded, pragmatic political leaders. But we also need to know the object of their pragmatism, the ends that they hope to achieve.

Pragmatism can be a legitimate reason to compromise, to accept incremental progress that falls short of an unachievable ideal. It can also be a pretext to defeat achievable reforms without an honest debate.

American voters are usually wary of radical, jarring change. Sincere reformers gladly take half a loaf, fight rear-guard skirmishes to protect past reforms, and wait for a moment when more is possible.

One such moment was 1933. Another was 1965. A third was 2009, at least for reforms that addressed the immediate causes of the financial crisis and the deep recession, despite Republicans' scorched earth opposition.

Americans strongly favored tough, even radical reforms to Wall Street, not cosmetic tweaks to the bailed-out financial system.

The elites who have filled economic policy roles in recent administrations, Democratic and Republican alike, did not share the public's enthusiasm for tough reform. And they regarded economic policy as the province of experts into which the opinion of the rabble should not intrude. "Our job was to fix it," former Treasury Secretary Timothy Geithner said, "not to make people like us."

When public opinion was considered, it forced tougher reforms than elites wanted. The Dodd-Frank Act as first introduced did not include a limit on proprietary trading by banks, the Volcker Rule. When President Obama embraced the idea with great fanfare, Wall Street sources were "startled and disappointed" that the President went beyond "the more moderate approach Geithner proposed" with Wall Street's support. The Obama Administration defended the idea on the merits, but privately acknowledged to reporters that the idea had "the political value of seeming tough on Wall Street."

Geithner bit his tongue in public. "Just because things seem populist doesn't mean they're not the right thing to do," he said.

But elites won more fights against tough reform than they lost, usually in behind-the-scenes maneuvers, not public debate. Elites dismissed tough reforms as simplistic in "not for attribution" interviews with favored reporters, despite the strong intellectual support for many proposals. Even proposals that sounded sensible, they argued, could have "unintended consequences."

Administration elites privately lobbied against legislation to allow judicial modification of mortgages in bankruptcy. The legislation would have helped millions of families save their homes from foreclosure but would have complicated the effort to help shaky banks appear sound. President Obama supported the legislation as a candidate and never publicly wavered from that position.

The legislation was defeated in a Senate vote.

They privately opposed the effort to limit shadow bank loans. The week before Lehman Brothers entered bankruptcy it had $200 billion in overnight shadow bank loans, which made an orderly insolvency impossible. A run in the shadow bank system led to Lehman's catastrophic collapse.

Sheila Bair and the FDIC proposed to limit the favored treatment of shadow bank loans in insolvency. Leading scholars, including one then on the faculty of Harvard Law School, Elizabeth Warren, supported the proposal.

The proposal passed the House but died in the Senate.

The administration never took a public position on the proposal by Senators Ted Kaufman and Sherrod Brown to cap the size of banks, which would have broken up the six biggest banks. But when the proposal failed in the Senate, administration elites privately took credit. "If we'd been for it," an unnamed "senior Treasury official" said, "it probably would have passed. But we weren't and it didn't."

Elites did not take half a loaf on Wall Street reform because American voters were queasy that tougher reform went too far. American voters and elites wanted a different loaf.