During the Dodd-Frank financial reform debate in early 2010, newly elected Senator Scott Brown of Massachusetts was referred to as an ATM for the bankers -- meaning that whenever they needed some more cash, they would stop by his office. It was not paper money he was handing out, of course, it was something much more valuable -- rule changes that conferred a greater ability to take on reckless risk, damage consumers, and impose higher future costs on the taxpayer.
Mr. Brown had this ability because he represented the final vote needed to pass Dodd-Frank through the Senate. He could have asked for many things -- including greater consumer protection, a more thorough investigation into mortgage practices, and reforms that would have cleaned up unscrupulous lenders. He asked for none of those changes -- or anything else that would have made the financial system safer and fairer.
Instead, Senator Brown's requests were designed to undermine the Volcker Rule -- i.e., he was opposing sensible attempts to limit the ability of big banks to place highly dangerous bets (and to blow themselves up at great cost to the rest of us). Mr. Brown seems to have been particularly keen to allow big banks to invest in hedge funds of various kinds -- and the Boston Globe reported recently that he has continued to push in this direction behind the scenes.
Such risky investments earn high returns when times are good (and big bonuses for senior executives), but they also imply large losses when something goes wrong. The special interests involved naturally like, "heads I win, tails you lose," but this is absolutely not in the broader social interest. Banks with FDIC-insured deposits absolutely should not be allowed to engage in such speculative activities. This was the original insight of former Fed Chairman Paul Volcker -- and it remains the right view today.
The economy absolutely does not need banks that can go crazy on various kinds of "proprietary" trading. In fact, it is exactly this kind of mismanagement of risk that brought the financial system to its knees and inflicted great damage on the economy in 2008-09.
Very large financial institutions get implicit government support and effective taxpayer subsidies -- this is what it means to be "too big to fail." This point is widely agreed on the right and the left of the political spectrum. One sensible idea is to offset these subsidies with a levy on large financial institutions, for example based on how much leverage they have -- as large amounts of debt relative to equity is precisely what makes these firms so prone to failure. And there was a "bank levy" of exactly this kind in the Dodd-Frank legislation until the very end. Then Senator Scott Brown killed it -- again, a form of cash withdrawal for the banks (and big future liability for everyone else).
Senator Brown knows the financial sector well -- in fact, he recently acknowledged working specifically on real estate transactions during the boom years. His lobbying of the U.S. Treasury and other government agencies has been sophisticated and exactly in line with the positions of the most dangerous big banks. He has drawn a great deal of support from financial sector donors, both to his campaign and running ads in parallel with his efforts (including through Karl Rove's Crossroads groups.)
In his bid for re-election, Mr. Brown presents himself as some sort of Massachusetts moderate, looking out for our common interest. But his record is unambiguously someone who sticks up for the special interests of big banks -- and creates great risk to the rest of us.
Mr. Brown had a chance to make a difference and he did, ensuring more cash now for big banks and more danger and destruction for the economy later.
Mr. Brown knows the banking sector well and his staff includes sophisticated financial services professionals. They understand exactly what they want and why they want it.
Fortunately, Massachusetts has a choice. The voters can either choose Scott Brown and his allies, the big banks. Or they can choose Elizabeth Warren who has worked hard to make the financial system safer, fairer, and less prone to collapse.
Mr. Brown fooled Massachusetts voters once, in his original election. Who thought they were electing someone to stick up for the global megabanks?
Will he fool them a second time -- when his achievements in diluting sensible financial reform are apparent for all to see?
Vote for Scott Brown if you want to hand the megabanks a mandate to ruin the economy, again.
Simon Johnson is the co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd. This post is cross-posted from The Baseline Scenario. Read more from the Fiscal Affairs series here.